Pay rises fall to lowest level since the end of first lockdown, research reveals

19 Feb 2021 By Jessica Brown

High levels of unemployment and continued uncertainty is suppressing wage growth, experts say

The median basic pay rise in the private sector was just 1 per cent in the three months to January, half of what it was in the three months to the end of 2020, new research has revealed.

Analysis from XpertHR also showed the median basic pay rise was the lowest since the three months to the end of August 2020, when it was at zero – meaning a pay freeze. By contrast, pay freezes accounted for a third of the pay settlements in the three months to January.

The research, based on a sample of 100 pay awards, found that four out of five received pay rises in the three months to January that were lower than the previous year. The same pay award was given to 18.1 per cent, with just 2.4 per cent receiving a higher amount.

January generally accounts for just under a quarter of pay settlements recorded by XpertHR each year, but it said activity was slow this year as employers remain concerned about the pandemic and uncertainty over Brexit.

However, David Spencer, professor of economics and political economy at Leeds University Business School, blamed labour market conditions and not Brexit for the slump in pay rises. “A big factor holding back pay rises is the higher level unemployment and, more generally, job insecurity,” he said.

“Workers have little bargaining power to push for higher wages, while firms are unable or reluctant to raise wages due to weak sales and uncertainty about the length of the lockdown,” he said, adding that compared to the high levels of unemployment linked to the coronavirus restrictions, Brexit was a “relatively minor factor” for the majority of employers.

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“If the economy bounces back later in the year, pressure might be felt for wage rises. But if, as seems likely, unemployment grows, then wages will remain sluggish,” Spencer said, suggesting that increasing public sector wages – particularly those of key workers – could itself help boost the economy.

Kirsten Sehnbruch, professor at the International Inequalities Institute at the LSE, also raised concerns about the impact of unemployment on wages. She said: “There’s a huge oversupply of labour at the moment compared to what we normally have, and the conventional reaction to that is that wages go down.

“In the hospitality sector, most people have relied on zero-hours contracts, earnings per hour might not fall, but the hours they can get work for will fall and the consequences could be devastating. There won’t be room in the labour market to do two or three  jobs, because they won’t be there. Poverty figures will creep up.”

Sarah Arnold, senior economist at the New Economics Foundation, said it was not surprising that employers are freezing wages in response to economic uncertainty, including concerns over potential mutations of the coronavirus and the effect this might have on the success of the vaccination programme.

This uncertainty “limits the ability of the economy to bounce back as infection rates fall and lockdown restrictions ease,” Arnold said. “This highlights the need for a bold and ambitious recovery plan from the government to help those hardest hit and keep the economy moving."

Frances O’Grady, general secretary of the TUC, called on the government to do more to protect pay growth, warning that otherwise the recovery would be slower and harder.

“Businesses need to know that furlough support will remain available until at least the end of the year, so they can have the confidence to press ahead with pay rises. And the chancellor must use the Budget to cancel the public sector pay freeze and make sure every key worker gets a pay rise,” she said.

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