In a surprising turn of events, UK workers are experiencing a rise in average real wages while productivity declines, according to new data from the Resolution Foundation. This phenomenon is primarily facilitated by falling import prices and reduced pension deficits, offering a temporary reprieve from inflation pressures.
The Decoupling of Wages and Productivity
The Resolution Foundation’s latest Macroeconomic Policy Outlook reveals that the traditional link between productivity and wage growth has been temporarily severed. This disconnect has allowed real wages to increase without exacerbating inflation. Real average weekly regular earnings have grown by 2.1% in the year leading up to February, helping to recover some of the losses from previous years’ wage squeezes. For instance, real average weekly earnings fell by 2.7% in the 12 months leading up to October 2022.
Remarkably, the 2.1% growth in real wages over the past year matches the total increase seen over the previous 16 years, from February 2008 to February 2024.
Key Factors Behind Wage Growth
Two main factors are contributing to the current wage growth despite declining productivity:
- Falling Employer Social Contributions: Employer business contributions to payroll taxes and pension schemes typically add about 20% to a firm’s wage bill. Recent reductions in these contributions, particularly to defined benefit (DB) pension schemes, have eased wage expenditure. Between Q3 2020 and Q4 2024, these contributions fell by the equivalent of 2.4% of wages, amounting to a £20 billion reduction.
- Improved Terms of Trade: During the cost of living crisis, surging import prices significantly reduced the UK’s purchasing power. However, over the past year, import prices have fallen by 2.9%, compared to a modest 0.1% decline in export prices. This improvement in terms of trade has enhanced the real value of wages for both importing firms and consumers.
A Temporary Relief
Greg Thwaites, Research Director at the Resolution Foundation, cautions that this period of wage growth is unlikely to be sustainable. Pension contributions cannot continue to fall indefinitely, and the freeze in employer national insurance thresholds may offset some of the current gains.
“After 16 years of wage stagnation, real pay packets in Britain are growing again at a healthy two per cent. This welcome turnaround is all the more remarkable given that output per worker – the ultimate driver of rising wages – has actually fallen,” Thwaites stated.
He highlighted that the current wage recovery is largely due to reversing the trends that led to shrinking pay packets during the cost of living crisis. Falling import prices have boosted purchasing power, and firms have redirected funds from pension deficit contributions into pay packets due to rising interest rates with UK workers seeing an extra cash boost.
While the recent wage growth is a positive development for the average UK worker, the Resolution Foundation warns that without a corresponding increase in productivity, this trend may not last.
The Workers Union Says…
“Sustainable wage increases in the future will depend on improvements in productivity. The resilience, dedication, and determination of the UK workforce is truly remarkable, epitomized by their constant ingenuity and willingness to embrace technologies and upskilling to meet the demands of a rapidly changing global economy. This steadfast commitment not only enhances individual careers but also strengthens the nation’s competitive edge, underscoring a steadfast resolve that propels the UK forward.”
