Wage growth in the UK hit 5.6% in the three months to November 2024, meaning more money in workers’ pockets, but potentially stoking fears of inflation.
Economists and analysts watch the strength of the UK labour market closely as a signifier of the health of the UK economy. Wage growth data as well as related labour statistics such as the UK employment rate are key indicators of economic criteria like business growth, and also feed directly into inflation.
As such, the Bank of England pays close attention to these readings when it sets interest rates.
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Data released on Tuesday from the Office for National Statistics (ONS) shows that wages in the UK are on the rise even as the number of available jobs decreases.
“On the surface, there are a lot of opposite moving forces here,” said Sanjay Raja, chief UK economist at Deutsche Bank. “Wage data was hotter on the back of upwardly revised wage data in October,” while “on the quantities side of the labour market, there are clear signs of cooling”.
Average weekly earnings (AWE) in the UK increased 5.6% in the period from September to November, both including and excluding bonuses. Adjusted for inflation based on the Consumer Prices Index (CPI), this suggests households now have 2.5% more available based on regular pay, and 2.4% based on total pay (including bonuses). Average annual earnings growth in the private sector increased 6.0%, compared to 4.1% in the public sector.
“We’re enjoying a smidge of extra wiggle room in our budgets right now, but it could have a sting in the tail if it ends up fuelling higher inflation,” says Sarah Coles, head of personal finance, Hargreaves Lansdown.
“Meanwhile, not everyone is getting to enjoy the benefits of better pay, because unemployment is rising. Uncertainty around the Budget, and some of the bad news around rising taxes for employers, could be playing a part in keeping a lid on employment, which fell over the quarter.”
Why are UK wages increasing?
“In November, [wage growth] was all concentrated within real estate, health, transport/storage, and hospitality. Manufacturing industries also saw some gains in the month,” says Raja.
However, Raja highlights that the way in which employment data is measured has impacted the readings.
“Beware compositional issues,” he says. “Changes in the employment base have been biasing up the AWE data. And that's exactly what we're seeing again in November, with the employment contribution adding roughly 0.4pp to the annual growth rate for AWE regular pay (not seasonally adjusted).”
Based on this, Raja expects the Monetary Policy Committee (MPC) to downplay the significance of the ONS data.
How does wage growth impact inflation and interest rates?
Wages grew faster than the rate of price increases in the three months to November. In theory – and Raja’s comments on the data above notwithstanding – that means that the amount of free income has increased.
Policymakers will be wary of this, because more money in the system could push prices up. With inflation already above the Bank of England’s 2% target rate, it could make the MPC more reluctant to cut interest rates when it meets in February.
On the other hand, rising unemployment would serve as a counterweight to this, implying the need for looser monetary policy in order to increase hiring activity.
“The looser labour market will reinforce the odds of a February rate cut,” says Raja. “The labour market is showing signs of wear and tear as weak demand and higher payroll costs start to weigh on employment. For now, the focus for the MPC will very much be on the supply side of the equation heading into its February MPR – this will likely determine how hawkish or dovish the MPC sounds in a couple of weeks' time.”
What is the unemployment rate in the UK?
While wage growth indicates that the UK job market is strengthening, the accompanying statistics on unemployment complicate the picture.
“For the sixth time in twelve months, payroll data shrunk,” says Raja. “Private sector payrolls were down 34,000 in Dec-24, taking the annual loss in private sector payrolls to 185,000.” Raja also highlighted the increase in redundancies, which rose to 112,000 in the three months to November 2024, its highest level in almost a year.
The data reflects the fastest decline in payrolled employees since November 2020 – when the covid pandemic was in full swing.
“Our data shows that, despite some recovery in December, employer hiring intentions remain around lows reached in 2020,” says Anna Leach, chief economist at the Institute of Directors. “The significant increases in employer NI, the forthcoming increase in the minimum wage and concerns over the cost of employment rights continue to sap demand for workers.”
Leach is not alone in criticising the increase in employers' National Insurance. Liberal Democrat Treasury spokesperson Daisy Cooper said this morning that “the government’s misguided jobs tax is already scaring off small businesses from hiring new people and being able to better serve our communities”, and called on chancellor Rachel Reeves to scrap it.
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