Worries about wage inflation ‘overdone’, think tank says

A report from the Resolution Foundation says wage growth is ‘normal rather than exceptional’ as headline figures don’t take into account the end of furlough

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Worries about wage inflation have been ‘overdone’, a think tank has said, arguing that headline figures fail to take into account the end of the furlough scheme.

Since restrictions began to lift at the beginning of this year, employers have faced warnings of record wage inflation, with official figures showing nominal pay grew 4.1 per cent in the year to January 2022, compared to an average of just 2 per cent in the decade before the pandemic.

However, a report from the Resolution Foundation has said headline wage growth figures did not take into account the impact the furlough scheme has had in suppressing wages – where the majority of the 11.7 million workers who were on the scheme received just 80 per cent of their usual pay.

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The report said that when the furlough scheme ended in September 2021, the majority of furloughed workers went back to full pay, accounting for nearly a quarter of the annual wage growth in the last three months of that year.

It added that the effect of this was likely to have continued into this year, accounting for a full percentage point of wage growth in the first three months of 2022.

Underlying wage growth – which controls for the impact of the furlough scheme, as well as other changes to the workforce such as the general level of qualification – averaged just 2.7 per cent in 2021, the same as in 2019 before the pandemic.

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Strong employment growth in some high-paid sectors over the last two years, including professional services and IT and communications, also helped to push up headline average earnings figures, despite a considerable increase in employment in low-paid sectors following the reopening of the hospitality and retail sectors.

Nye Cominetti, senior economist at the Resolution Foundation, said the “welcome success” of the economy post pandemic – which is seeing low unemployment and high vacancy rates – was driving strong nominal wage growth. But, he said: “Worries that it might be too strong are overdone.

“Given the tightness of the labour market, pay growth is best seen as normal rather than exceptional, once the impact of the end of the furlough scheme is taken into account. In fact, underlying wage growth is similar to what we were seeing before the pandemic hit,” he said.

Cominetti added that, with inflation expected to reach 8 per cent in the coming months and nominal wage growth forecast to be just 5 per cent through 2022, most workers will still see their earnings fall in real terms, “further squeezing living standards”.