Wages are improving, but from a low starting pointby Jay Elwes / December 10, 2015 / Leave a comment
Published in January 2016 issue of Prospect Magazine
Read the rest of Prospect’s big ideas of 2016 here After a prolonged period of stagnation, pay in Britain is on the rise. The Office for National Statistics (ONS) reported in November that wages in Britain had increased by 3 per cent from the year before. It was a welcome announcement. Earnings in Britain have been declining for 30 years. Now they are on the rise, and are projected to rise faster than inflation. For the past three decades, profits as a share of the economy have been growing and are now at a record high. Meanwhile wages have stagnated. In 2016, partly as a result of higher minimum wages, the share taken by profits will start to decline. As the populations of developed economies grow older, younger people of working age are increasingly in demand. Rising wages partly reflect this constricting workforce. The Bank of England says that wage growth will persist in 2016. The Bank also expects prices to rise, saying that inflation would be 0.4 per cent by the end of 2015, and 0.7 per cent by March 2016. Inflation will rise to 2 per cent by mid-2017. Inflation will rise, but at a slower pace than wages, kept in check by declining commodity prices—especially oil—and cheap imports from emerging markets with weakening currencies. (Despite having recently gained reserve currency status, the Chinese Renminbi will fall sharply in value during 2016, perhaps by up to 20 per cent.) Wages are improving—but from a low starting point. In November, KPMG, the accountancy firm, released a report showing that the proportion of British workers earning less than the living wage had increased for three years in a row. The national living wage for over-25s will come into force in April, setting a minimum of £7.20 per hour, but Bank of England analysis says that “overall impact on average wage growth is estimated to be very small.” Low inflation will coincide with increasing UK productivity growth. The ONS reported in November that productivity—economic output per worker—is beginning to rise. Britain is heading for a period of sustained wage growth.