Inflation drives the fastest fall in real pay on record, but what does that mean for business?

With real pay declining and the number of job vacancies growing, People Management asks the experts what the government and organisations can do to help rectify the ongoing problems

Credit: Renata Angerami/Getty Images

Inflation rates have driven the fastest fall in real pay on record, with wages falling behind the rising cost of living, the latest Labour market overview from the Office for National Statistics (ONS) has revealed. 

Despite some positive developments, such as the growing number of people in work and redundancies remaining at very low levels between April and June 2022, the drop in pay dominates the headlines, with Darren Morgan, director of economic statistics at the ONS, confirming that “excluding bonuses, it is still dropping faster than at any time since comparable records began in 2001”.

So, with all eyes set on the declining value of pay amid the shifting nature of the UK labour market, People Management explores the effect of the recent changes on businesses and employees alike.

Declining real earnings despite some wage increases

As the country faces double-digit inflation, real average weekly earnings fell by 3 per cent in the three months to June, the biggest drop since 1977, according to the Resolution Foundation.

“This squeeze has come about despite robust pay growth and a lively jobs market, with pay settlements strengthening slightly, and almost a million people moving jobs in the last three months,” says Nye Cominetti, senior economist at the Resolution Foundation.

And while regular pay grew by 4.7 per cent in the three months to June, and total pay including bonuses rose by 5.1 per cent, this was not enough to make a substantial difference to workers.

The foundation also warns that with the effects of last year’s furlough, adding around 0.5 percentage points to measures of annual pay growth, “the true scale of Britain’s pay squeeze is even deeper than official figures suggest”.

On the other hand, the organisation notes that the shrinking gap between regular and total pay levels suggests that some of the bonuses and one-off payments that have boosted total pay in recent months “are now showing up in higher pay settlements, providing a longer-term boost to pay packets”.

Soaring number of job vacancies 

Jane Gratton, head of people policy of the British Chambers of Commerce, highlights that despite a small increase in employment levels, the number of job vacancies in the economy remains around the highest on record.

“Skills and labour shortages have reached crisis point for many firms. The impact is being felt on their ability to meet customer demand and forcing some to turn away new business, because they simply do not have the human resource,” she warns.

While emphasising the urgency of the problem, which is restricting growth and business confidence, Gratton says that, with the largest spike in interest rates in three decades, ongoing supply chain disruption and eye-watering energy bills, “there is a limit to how much additional cost business can absorb”.

What comes next amid the turbulent economic climate

Acknowledging there is no evidence yet of big wage-price spirals, rising unemployment or a major return to work brought about by declining household incomes, Cominetti adds that “whether these trends materialise in the months ahead will help determine the scale and distribution of the latest economic crisis”.

With vacancy rates still high, Neil Carberry, chief executive of the Recruitment & Employment Confederation, says “the overall picture is still positive for those looking for work or to change jobs to raise their pay”, as unemployment is low and stable, and there are still almost 1.3 million vacancies available.

But, he says, there is a substantial role the government needs to play in providing measures to support a sustainable labour market for the long term; “for example, on skills, immigration, childcare costs and local transport – all being part of the solution”,  Carberry adds.

Echoing this, Gratton shares her belief that “the government can help ease the growing pressure in the labour market at no extra cost to the Exchequer”. 

Considering the current challenges, she says the country needs an immediate review and reform of the shortage occupations list (SOL) to include more jobs at all skill levels. “This will give firms breathing space to train and upskill their workforce. We have more than a million more job vacancies than people available to work, so the sooner we start the SOL review, the better,” she says.

In addition, Gratton highlights the importance of encouraging economically inactive people back into the UK labour market – suggesting that access to publicly funded rapid retraining opportunities could play a key role in this.

“We cannot see another month of the same old news, it’s time for action and we’re offering the solution. It’s time for the government to listen,” Gratton says, adding that “businesses must be part of the solution too” by creating the right workplace conditions; for example, by securing training opportunities and a wider focus on workplace healthcare and support.

In relation to employers’ efforts, Carberry says as employment is still much lower than pre-pandemic, with the number of people out of work and not looking for a job being much higher, “firms need to think carefully about their offer to potential staff in this environment” and they need to work with their recruiter – “as flexible forms of employment have a big role to play in closing the gap” he adds.

Similarly, Steve Smith, president of international at Sterling, highlights the importance of businesses putting their best foot forward when it comes to recruitment and attracting talent while skills are still in short supply across most of Europe. “Particularly in a competitive recruitment environment, ensuring applicants have the best possible experience with a brand remains of paramount importance and will be for the foreseeable future,” Smith says.

He believes it is essential for organisations to understand their weakness and, for example, tounderstand why candidates are dropping out of their hiring process, adding that “in the current economy, it’s simply not a viable option to overlook how important it is to provide an efficient and engaging experience for candidates throughout the entire hiring process”.