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Wages growth mirage

Pay boost short-lived once inflation returns to normal
Hajera Blagg, Tuesday, June 16th, 2015

Wages are expected to grow at the fastest rate since before the crash, many newspapers reported earlier this week. It’s good news on the surface, but read further down their columns and the reason for growth in wages may prove to be as illusory as it is temporary.

As the Resolution Foundation noted, wages are picking up mainly because inflation has been low, dipping below zero in April for the first time in 55 years. But inflation figures released today (June 16) show that inflation, driven by higher oil prices, is picking up again and has now gone up to 0.1 per cent.

While many will regardless see wages growth now as a cause for celebration, with more working people having greater spending power, the Resolution Foundation highlights that the “mini-boom” has been a long time coming, and that it could very well be short-lived.

“It’s worth reiterating how long we’ve been waiting for this kind of a rebound,” a Foundation blog post noted yesterday. “Almost everyone has expected wages to pick up long before now, particularly with evidence of tightening slack and nascent signs of business and worker confidence. It’s been a wage recovery long-postponed.”

The Bank of England has predicted that nominal pay growth will be no higher at the end of the year than it will be now, if predictions for Wednesday’s figures are correct. If this is the case, and if the BofE’s expectations of continuously rising inflation prove true, economic recovery for working people will yet again prove tenuous.


“With our ‘two-months-ahead’ prediction indicating that nominal pay growth may not build all that much further in the short term, even a modest increase in inflation would return us to fairly weak real wage growth,” the Resolution Foundation explained, adding that focusing on productivity is critical.


“Long after inflation has moved back into more normal territory, it is productivity growth that will determine the extent to which economic recovery feeds through to pay packets. Buoyed by Wednesday’s good news, it is to our persistent productivity puzzle that the Chancellor’s attention ought to turn.”

No puzzle

Unite has long argued that, while short-term wages figures might provide feel-good fodder for headline news, sustained productivity growth is the key to real, long-term economic prosperity felt by all.

Unite assistant general secretary Steve Turner said that poor productivity growth is an outcome of specific policy choices.

“Without public investment in strategic areas – such as housing, transport, manufacturing and communications – the slowest, and mainly consumer driven, economic recovery on record is now slowing down,” Turner noted in a UniteLive comment piece last week.

“A lack of investment has led to the hoarding of cash by the corporations – the real reason why we have poor productivity growth,” he added. “As Geoff Tily, TUC economist has noted, there is no ‘productivity puzzle’; austerity means that private companies are not investing and upgrading their equipment.”

An Acas report confirmed this view – that lack of investment has been a key player in hobbling productivity. The report also highlighted how low pay, and lack of investment in the workforce in particular, have also been contributing factors.

Interested in learning more about what how austerity itself is hampering productivity? Read the TUC’s report “Productivity: No puzzle about it” here.




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