“Real” pay growth may have turned negative in October 2021
14 December 2021New data from ONS shows that the UK labour market remained very strong in October 2021.
New data from ONS shows that the UK labour market remained very strong in October 2021.
Businesses are recruiting new employees at an impressive rate – the number of paid employees grew by 257,000 between September and October 2021.
Despite this, demand for additional workers remains very high, with 1,219,000 unfilled vacancies in October, a record for the UK.
Unemployment is low at 1.4m (or 4.2%), marginally higher than it was pre-COVID. There is clearly no large pool of uncommitted workers available to recruit from.
There is, however, a large pool of “economically-inactive” individuals – about 19.7m individuals. This group grew during the COVID outbreak – it is not clear why, or why these individuals have not yet moved back into the workforce.
One benefit of the strong labour market is steadily-increasing pay. Over Summer and Autumn 2021, average pay in the UK rose ahead of inflation, meaning that many workers became better-off in “real terms”.
However, the rate of pay growth has been slowing, whilst inflation pressure has risen – as a result, in the latest month, pay growth has turned slightly negative in “real terms”, as shown on the accompanying chart.
This finding is a little surprising, in view of strong demand for labour – it is not entire clear what is happening here. One possible explanation is that the number of part-time workers is rising, thus reducing average pay levels.
(Note that measuring real pay growth is very difficult, as the composition of the workforce changes over time, especially during periods of strategic turbulence. Much also depends on the inflation measures used to determine “real” pay.
In the accompanying chart, IGD has used the RPI inflation measure. Unlike the alternative CPI measure, RPI includes mortgage interest payments and is therefore influenced by house prices and interest rates.
RPI may be seen as giving a more accurate view of the actual living costs faced by UK households but, in this analysis, using RPI gives a “pessimistic” view of pay, since RPI tends to rise ahead of the CPI).
Using the lower, but more limited, CPI inflation measure, real pay growth in October 2021 would have been +1.1%)
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