UK Wage Growth Accelerates, Adding Pressure on Inflation Targets: Exploring the Factors at Play
The latest data from jobs website, Indeed, in partnership with the Central Bank of Ireland, indicates that wage growth in the UK accelerated in May 2022. The average wage quoted for job adverts was 7.2% higher than the previous year, the highest recorded rate since 2019. This uptick in wage growth comes at a time when the labour market has slowed, reflecting the challenge faced by the Bank of England (BOE) in meeting its inflation targets. The data highlights that while wage growth has stabilised in most Eurozone countries, the UK remains an outlier. The slowdown in hiring has not constrained advertised wage growth in the UK as it did across other countries.
Possible Explanations for UK’s Wage Growth Uptick
Several reasons could explain why the UK is experiencing higher wage growth rates compared to other countries facing similar labour shortages. Firstly, it is possible that workers in the UK are more affected by inflation pressure compared to other countries. Secondly, the recent pay deal for nurses working in the UK’s National Health Service is also a contributing factor. Finally, April’s increase in the statutory minimum wage may have also contributed to the boost in average wages.
Labour Experts’ Take on UK’s Labour Market Challenges
Clare Lombardelli, the Organisation for Economic Co-operation and Development’s chief economist, warned this week that the UK faces a unique labour market challenge that has worsened its inflation situation. The constraints on the country’s workforce due to the COVID-19 pandemic have contributed to labour shortages, which increased the pressure companies face to pay higher wages. Hence, the country’s inflation targets may be harder to meet than other countries.
But it’s not all dismal news for the UK, as separate data released on Thursday by KPMG and the Federal Recruiting and Employment Bureau suggests that labour shortages and wage pressures could ease later this year. The report found that the number of candidates available for roles rose in May at the fastest pace since 2020 due to more widespread layoffs and a hiring slowdown. However, the candidates available for roles are not always a match for sectors still keen to hire, and inflation continues to push wage growth upwards.
Conclusion
The BOE’s fear is that the current wage pressures could escalate the UK’s inflation woes, making it challenging to achieve its 2% inflation rate target. The challenges facing the UK’s labour market suggests that the country’s inflation targets are under threat. However, various factors can explain the sudden uptick in wage growth rates in the UK, from the pay deal for NHS nurses to the rise in the minimum wage. The hope is that the labour shortage and tight markets will ease as the year progresses. Nonetheless, the urgency to meet the inflation target remains crucial for policymakers.
Summary
– UK wage growth spiked in May despite a slowdown in the labour market
– Wage growth rates stabilised in most Eurozone countries
– Possible reasons for the increase in UK’s wage growth rates are high inflation pressure, recent pay deals for NHS nurses, and a rise in the minimum wage
– Clare Lombardelli, the Organisation for Economic Co-operation and Development’s chief economist, noted that the UK’s labour market challenges worsen the country’s inflation targets compared to other countries
– Separate data suggests that labour shortages and wage pressures could ease later this year
– The urgency for policymakers to achieve BOE’s 2% inflation target remains critical.
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Wage growth accelerated in the UK in May even as the labor market cooled, according to real-time data which highlights the challenge the Bank of England faces in bringing inflation back to objective.
The average wage quoted in UK job adverts was 7.2% higher last month than a year earlier, the fastest pace seen in data dating back to 2019, based on an international pay tracker published by the job search website Indeed, in partnership with the Central Bank of Ireland.
Indeed, he said that, while still high by historical standards, wage growth has slowed sharply in the WE and has stabilized in most euro area countries in recent months, after peaking in 2022. This reflects a decline in the vacancy to jobless ratio, a key measure of workers’ bargaining power. In the UK, however, advertised wage growth accelerated despite the slowdown in hiring.
“The UK is an outlier,” said Pawel Adrjan, director of EMEA Economic Research at Indeed. He added that the recent pay deal for nurses working in the NHS was a factor, and April’s increase in the statutory minimum wage may have also pushed up average wages.
But wage pressures could also be stronger in the UK than in other countries facing similar labor shortages simply because workers were facing higher inflation, he said.
Indeed’s tracker is less comprehensive than official earnings statistics, but it’s a timely indicator of workers’ ability to secure a pay raise when they change jobs. The data will reinforce the Bank of England’s fears that wage pressures are now amplifying the UK’s inflation problem, making it more difficult to get it to its 2% target.
Clare Lombardelli, the OECD’s new chief economist, warned this week that the UK’s inflation challenge was more worrying than elsewhere because it had “a particular problem on the labor market”, with a post-Covid contraction in the size of the workforce which has increased pressure on companies to pay people more.
However, separate data released on Thursday will offer policy makers hope that labor shortages and wage pressures may ease later in the year.
A monthly survey by KPMG and the Federal Recruiting and Employment Bureau found that the number of candidates available for roles rose in May at the fastest pace since 2020, reflecting more widespread layoffs and a hiring slowdown.
He also suggested that initial wage growth had begun to slow, although the survey still indicated wage growth well above historical trends.
Neil Carberry, chief executive of REC, said there was a clear divide between sectors where hiring was still strong, such as hospitality, construction and engineering, and weaker areas such as IT and retail.
“For corporate hiring, increased candidate availability will help address shortages,” he said. But she added that people available for the roles aren’t necessarily a match for sectors still eager to hire and that “inflation means wage growth remains high.”
https://www.ft.com/content/8dbeb352-9cda-40cf-90b1-ffe95e294fc8
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