Fall in UK workers' real pay likely to squeeze living standards

Private sector employers blame the costs involved in rolling out the government’s auto-enrolment pension scheme and Apprenticeship Levy for below-inflation salary increases.

UK employers are expecting to award median pay increases of only 1% this year, which is lower than at any other time over the last three and a half years.

The Labour Market Outlook survey of 1,000 employers undertaken by the Chartered Institute of Personnel and Development (CIPD) and staffing agency The Adecco Group revealed that, even though demand for labour remained robust in the second quarter of 2017, basic pay forecasts in the 12 months to March 2018 have dropped by half a percentage point from 1.5% three months ago.

About a fifth of private sector firms blamed the fall on the costs involved in rolling out the government’s auto-enrolment pension scheme and Apprenticeship Levy, while 83% of public sector organisations cited centrally-decided pay restraint measures.

The report’s net employment balance, which measures the difference between the number of employers expanding and reducing their workforces, remained positive at +20. Although the figure was down on the previous quarter’s figure of +23, it was consistent with a modest deterioration over the last two years.

Gerwyn Davies, labour market adviser at the CIPD, said a slowdown in basic pay increases along with expectations of rising inflation meant there was a “real risk” a significant proportion of UK workers would see their living standards drop as the year progressed. This situation could have “serious implications for consumer spending”, which has helped to support national economic growth in recent months, he continued.

“The weak pay data is no surprise given the continued weak productivity growth in the UK,” Davies added. “However, this is being exacerbated by many employers’ passive attitude towards workforce development and training, despite reporting hard-to-fill vacancies.”

The findings have also been backed up elsewhere. The National Institute of Economic & Social Research indicated that wage rises would be capped at an average of 2.7% against inflation rates that are likely to peak at 3.4%. This would mean workers face the largest real-terms cut to their take-home pay since early 2014.

The inflation prediction is much higher than that forecast by the Office for Budget Responsibility, the Treasury’s independent forecaster, which said earlier this year that inflation would hit 2.4% by the end of 2017.

Even more gloomily, however, the TUC has predicted that prospects for pay growth in the UK are among the worst of all the advanced economies, with only Greece, Italy and Austria forecast to suffer bigger falls in real wages – pay adjusted for the effects of inflation – by the end of 2018. The trade union umbrella organisation said that UK workers were on course to see their real wages fall by 0.5% between the start of 2016 and the end of 2018, based on forecasts from the Organisation for Economic Co-operation and Development.

In contrast, real wages were predicted to rise at an average rate of 2.6% over the same time period in most of the other 31 countries.

But the situation means that UK real wages will be 6.8% lower in 2018 than they were in 2007 before the financial crisis. Only Italy and Greece have suffered bigger declines of 7.3% and 25.2% respectively compared with an average of 3.9% growth generally across the Eurozone.