Seven reasons why weak wage growth leaves consumers facing a pay squeeze

“Even though the unemployment rate dropped to a new 42-year low of 4.4% in the three months to June, wage growth in the UK is only inching higher, reaching 2.1% in the three months to May, excluding bonuses," says AJ Bell Investment Director Russ Mould.

“While any increase in pay packets is always welcome, that modest rise is not enough to offset inflation, which came in at 2.6% on the consumer price index yesterday:

Source: ONS

“That will be of great concern to consumers who are worse off in real terms, as inflation is outstripping their wage increases and thus depriving them of valuable purchasing power, especially as interest rates on their savings remain near historic lows for good measure.

“It will therefore be of concern to retailers, especially those whose online offering is weak or where trading down represents a threat and not an opportunity.

“The weak rate of wage increases is baffling economists and central bankers alike, especially since the employment rate stands at 75.1%, the highest level since records began in 1971.

“Mark Carney, Governor of the Bank of England, has frequently cited accelerating wage growth as a possible trigger for the long-awaited increase in UK base rates but today’s figures are hardly likely to persuade the Monetary Policy Committee that the UK economy is overheating and in need of higher borrowing costs.

Curveball for Phillips fans

“The so-called Phillips Curve argues that as unemployment falls, wage growth will accelerate and vice-versa, but for the moment this relationship seems to be breaking down. This is all the more unusual when corporate profits stand at a record high, relative to GDP, in the UK.

“There are several possible explanations for why this could be and it is likely that this combination of factors is to blame for weak wage growth:

1. Companies are paying into employee pensions under auto-enrolment schemes and focusing their attentions here. As such, workers are getting more cash – they just can’t access it until they are least 55.
2. Companies are adjusting to the minimum wage and the national living wage, with the unintended consequence that in some cases other staff are getting lower increases or employees are being given fewer hours to work, as employers look to manage their cost base.
3. Public sector pay freezes are weighing on the national averages.
4. A big chunk of job creation is coming from self-employment, where would-be entrepreneurs tend to pay themselves little or nothing during their new companies’ formative years.
5. A further portion of job creation is coming from the gig or sharing economy, where workers can be paid the minimum or national living wage as a starting point.
6. Companies are keeping costs tight given the prevailing economic uncertainty in the run-up to Brexit in 2019
7. Workers are reluctant to demand lofty pay increases for fear of pricing themselves out of a job, especially with the threat of being replaced by a robot hanging over so many manufacturing and even some service jobs.

“All of them suggest pay could remain subdued for some time to come, causing further pain to consumers’ wallets unless inflation starts to sag, which it could, if oil falls further and the pound rises, to choke off import cost increases.”

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