Real pay growth to stagnate in 2017 and 2018

07 August 2017 3 min. read

UK private sector workers are again set to see wages mired in stagnation, according to a new report. While real wage growth is relatively high, at 2.9% over the coming two years, a high headline inflation rate of 2.8% over the same years will see real wage growth stuck near 0% in real terms, creating new economic uncertainties as consumer spending is expected to drop.

Since the financial crisis, real wage gains for workers across much of Europe have been relatively insubstantial – in many cases, keeping up with inflation. Latest data from recruitment specialist Willis Towers Watson, titled 'Salary Budget Planning Report', explores wage growth throughout Europe, including the latest UK specific figures.

Wage growth in the UK has stalled in recent years, thanks in no small part to governmental austerity, according to a recent UCL report. The cap on public sector pay in particular has been a continued area of contention, where many workers has seen their real wages decrease significantly in real terms; teachers for instance, saw a decrease of £3 an hour and police officers by £2, while the government recently voted down an opposition bill tabled by the Labour Party to end the public sector pay-cap in light of the work done by firemen and the police in a succession of summer tragedies. Private sector workers too have seen a significant drop in real term wages in recent years, with an LSE study estimating an effective 10% decrease since the financial crisis to 2015.

The latest study does not bode well for wage growth for UK workers over the coming two years – particularly in light of inflationary pressures from, among others, a lower pound. Private sector employers are set to raise wages by around 2.9% this years, the highest increase in a number of years, however, the rate of inflation is set to hit 2.8% this year – reflecting a meagre 0.1% real wage increase for workers – on average. The research project a similar trend in 2018, with wage increases also at 2.9% and inflation, again, running at around 2.8%.

Real pay growth to stagnate in 2017 and 2018

Commenting on the figures for the UK, Keith Coull, Senior Consultant in Data Services at Willis Towers Watson, said, “The UK jobs market has otherwise been robust with record employment rates and the lowest unemployment since 1975. But coming so soon after the post-crisis pay squeeze, this latest freeze on wages, driven by an inflation rate accelerating sharply since 2016 and showing no sign of slowing down, suggests the pressure on pay and living standards is likely to intensify in the coming months.”

European figures

The result is considerably below that of the rest of Europe, where on average, real wage growth is projected to hit 1% this year. Ireland will see the highest level of real wage growth, up 1.9%, while France and Germany see increases of 1.1% and 1.2% respectively. Dutch private sector employees will see their wages up by 1% in real terms.

“In the European labour market, real terms wages are still growing in 2017, but rising inflation means those real wage increases are less generous overall than in 2016. For example, 82% of countries in the EU28 will get pay increases this year above or roughly in line with the prior year increase. However, when taking rising inflation into account, there are no countries with real wage increases above or in line with prior year increases. The average EU28 real terms pay increase is now 0.9%, which has dropped from 2.6% in 2016.

UK employers, among others, meanwhile, have also begun to offset risks to individuals through the so called ‘gig economy’, which, when combined with employers leveraging zero hour contracts, have seen the number of workers living in uncertainty rise to more than 3 million in the UK. Household borrowing, continues to rise as lenders offer increasingly low rates – with the Bank of England recently warning of a “spiral of complacency” about increased consumer debt loads and low wage growth.