Despite low jobless rate real pay dropped for first time in more than two years in January as inflation outpaced wage growth

Workers suffered a fall in real pay for the first time in more than two years in January as inflation outpaced wage growth, underlining the fresh squeeze in living standards facing UK households.



Total pay including bonuses was up 1.7% compared with January 2016, weaker than the 1.8% headline rate of inflation and the lowest rate of wage growth since February last year according to the Office for National Statistics.

Pay prospects weakened despite a fall in Britain’s unemployment rate to its joint lowest level since 1975. The jobless rate fell to 4.7% in the three months to January from 4.8% in the previous three months, matching the rate last seen in 2005. It was last lower in the three months to August 1975, when it was 4.6%.

UK unemployment is as low as 1975 – but why aren't wages rising? Read more

Martin Beck, a senior economic adviser to the EY Item Club, a forecasting group, said the slowdown in pay growth was worrying.

“The most concerning aspect was the further slowdown in wage growth. The January data already showed the first year-on-year decline in real wages since August 2014 and, given the likelihood that inflation will continue to climb through 2017, continued weakness in pay growth could threaten a squeeze on household finances. This, in turn, would risk a more severe slowdown in consumer spending growth than we currently anticipate.”

Household finances are expected to come under increasing pressure in 2017, as the sharp fall in the value of the pound since the Brexit vote increasingly feeds through to higher prices for consumer goods. Inflation is expected to rise to about 3% by the end of the year and household budgets are already under increased strain from a spike in supermarket prices.

Frances O’Grady, the general secretary of the TUC, said the prime minister must put a stop to the slide in living standards.

“Workers are facing the double whammy of rising prices and slower pay growth. But Theresa May seems content to leave Britain drifting towards a new living standards crisis. Working people in Britain have seen their pay take a proper hammering in the last decade. It’s long past time the government took action.”

Taking into account a longer period of time, total pay growth slowed sharply from 2.6% to 2.2% in the three months to January, the lowest since early 2016. Real pay growth – adjusted for inflation – was just 0.7%, the weakest in more than two years.

Chris Hare, an economist at Investec, saida squeeze in real wages was under way and was likely to intensify as inflation picks up.



“There are clear signs that households are beginning to suffer from a real income squeeze. Because household spending makes up around two-thirds of UK demand, this is the main reason why we see the economy slowing down over the course of this year.”

The employment rate was unchanged at 74.6%, the highest since records began in 1971. The number of people in work rose by 92,000 over the three months, to 31.85 million. There were 1.58 million unemployed people, 31,000 fewer than for August to October.

David Freeman, a senior statistician at the ONS, said: “With the unemployment rate last lower in summer 1975 and the employment rate still at a record high, the labour market remains robust. But smaller wage increases and higher inflation mean the growth in real earnings has slowed sharply in recent months.”

The employment minister Damian Hinds welcomed the fall in unemployment, saying: “Employment is up, wages are up and there are more people working full time. This is good news for hardworking families across the UK as we continue to build a country that works for everyone.”

The latest official snapshot of the UK jobs market also confirmed that the number of people on zero-hours contracts hit a record high of 905,000 in the final three months of 2016. It was an increase of 101,000, or 13%, compared with the same period a year earlier.



The ONS said people on zero-hours contracts, which do not guarantee a minimum number of work hours, were more likely to be young, female, part-time or in full-time education people in other employment. Such contracts are widely used by retailers, restaurants, leisure companies and hotels.

About one in three people on a zero-hours contract want more work, compared with one in nine people in other employment.