Last year was a year of contradictions, at least as far as pay is concerned. On the one hand, there was a big rise in employment, with the number of people in work hitting the highest level on record. More people in work should, in theory, mean increased upward pressure on pay, but in fact most workers saw their real pay continue to decline last year.
This combination of a tightening labour market alongside wage stagnation flies in the face of economic orthodoxy and has left observers asking, is this the new normal for the UK labour market or is there change on the horizon in 2018?
Much of the recent focus in the press with respect to pay and earnings has been on the sharp rise in inflation brought about by the post-referendum depreciation of sterling. As RPI hit 4% towards the end of last year, the partial recovery in post-crisis real earnings witnessed in 2014 and 2015 was largely reversed, and real average earnings have fallen back to the level they were at in summer of 2000.
But, the focus on inflation is misleading. The fundamental problem has actually been employers curbing pay since the financial crisis; whilst average weekly earnings grew by an annual average of 4.3% between 2001 and 2007, they grew by just 1.9% a year between 2008 and 2017.
This pattern of weak pay growth, which continued in 2017, has left workers’ earnings vulnerable to the kind of inflationary shock that was sparked by the Brexit referendum. Many of the professional and specialist workers represented by Prospect have seen their real pay decline significantly in recent years, especially those affected by the ongoing public sector pay cap.
So, will this story improve in 2018? The Bank of England thinks yes, and believes pay settlements will tend to cluster in the region of 2.5%-3.5% (compared with 1.5% to 2.5% in 2017, according to Incomes Data Research). If current inflation projections prove accurate, this would amount to a small real pay rise for most workers this year.
The basis for the Bank’s optimism is the tightness of the labour market as the growth in employment has led to recruitment pressures in many sectors. A recent CBI survey of employers found that just over half (51%) expected to raise pay at or above the rate of inflation in 2018, adding to optimism that pay may improve this year.
But, there are signs that job growth may be starting to slow, with the employment rate falling slightly in the three months to October (the latest available figures). And, unfortunately, we can’t rely on the stated intentions of employers. In last year’s CBI survey the number of employers who said they planned real pay increases was even higher (57%), but as inflation rose sharply during 2017, pay settlements remained flat.
The more pessimistic view, that real pay stagnation will continue, chimes with the most recent forecasts from the Office of Budgetary Responsibility (OBR), who revised their long-term forecasts for earnings sharply downwards. Based on the OBR’s November forecast real pay won’t fully recover from the effects of the financial crisis until at least 2025. This means UK workers will have experienced almost two decades of lost earnings growth.
This downward revision to earnings growth was underpinned by a similar downward revision to the outlook for productivity growth. Productivity (in basic terms the amount produced for every hour worked) is important because it sets an ultimate ceiling on income growth, and the UK’s productivity performance in the last decade has been particularly abysmal by any standard. Fixing that is one of the most pressing economic challenges the UK faces.
This is where unions can have a critical role to play. Unionised workplaces have higher training rates, lower rates of staff turnover, and lower rates of accidents and work-related ill-health, all of which are crucial to boosting productivity. Unions, as Prospect has shown recently, are also critical to the fight for workplace equality, and research suggests that creating more equal workplaces will also result in more productive workplaces. And with more productive workplaces comes better prospects for pay.
So, while the pay outlook for 2018 is currently less than encouraging, a stronger union movement is key to changing that - which is why there’s never been a better time to join Prospect.