Pay growth lags behind inflation for the first time in two-and-a-half years, highlighting impact of Brexit uncertainty

This article is more than 3 years old

This article is more than 3 years old

Labour and the unions accused the government of ignoring the plight of ordinary workers after UK pay growth fell below inflation in early 2017 for the first time in two-and-a-half years.

Official figures showed that workers’ average earnings rose by 2.1% year on year in the three months to March, the weakest increase since July of last year.

With inflation running at 2.3% in the same period, that meant real-terms pay lagged by 0.2% in the first three months of the year, the first fall since the third quarter of 2014.

UK unemployment rate hits 42-year low but real wages shrink – business live Read more

The Labour party has made weak wage growth one of its main themes in the run-up to the general election on 8 June, which opinion polls suggest Theresa May is on course to win.

Analysis by the Resolution Foundation showed that wages were still £16 a week below their 2008 peak, leaving many families forced to borrow to make ends meet.

John McDonnell, the shadow chancellor, said the figures revealed “the Tories’ total failure to improve the living standards of working families”.

He said: “Real wages are lower than they were in 2010 and, after seven years of the Tories, they are now falling again.”

McDonnell has promised a Labour government would introduce a higher minimum wage and end to a cap on public sector pay rises.

Analysts said Britain was breaking all the rules of the postwar era as record levels of employment and unemployment at a 42-year low failed to spur consistently strong wage increases.



The unemployment rate in the period between January and March fell unexpectedly to 4.6%. Economists polled by Reuters had expected the rate to remain at 4.7%. The number of people in work rose by 122,000, taking the employment rate to a record 74.8%, the Office for National Statistics said.

John Philpott, the director of the JobsEconomist, said: “This is a jobs market that looks better on paper than it feels in the pocket, reflecting a structural shift in the types of work people do and the relative bargaining power between workers and bosses.

“No wonder workers’ rights, productivity and pay rather than the availability of jobs per se, is a key battleground in the UK general election campaign.”



The TUC general secretary, Frances O’Grady, said: “Today’s fall in real wages risks tipping working people into another living standards crisis. And that poses a major challenge for whoever forms the next government.

“The big question for every party is – what’s your plan to get Britain’s wages rising again?”

Liberal Democrat spokesman Vince Cable said:“This squeeze on living standards is almost certainly caused by the falling pound since the Brexit vote.

“If Theresa May is allowed to pursue her extreme Brexit agenda, we can expect further weakening of the economy and erosion of people’s living standards.”

May, who has denied that the Brexit vote lies behind the broader economic slowdown, has said she is aware of the squeeze on household spending and that she will cap energy prices, a move that appears to break with the Conservative party’s usual pro-market stance.

But inflation has already moved up to 2.7% and is heading above 3%, according to many forecasters, adding to the pressure on politicians to act.

The Bank of England is watching for signs of a pickup in wages that could add to inflation. So far it has judged that most of the pressure on shop prices has come from higher import costs that follow a sharp fall in the value of the pound.

Sterling fell by almost a quarter against the dollar after the UK voted to leave the EU before a recovery in recent weeks that has limited to the drop to nearer 13%.



So far the Bank of England believes there is little pressure on most employers to raise pay sharply, which could feed a more permanent inflation problem.

This week, a survey by the Chartered Institute of Personnel and Development found that most large employers were preparing to raise wages by 1% this year.

Other surveys have shown wage rises softening amid growing numbers of job cuts as Brexit uncertainty affects the labour market.

The Bank of England has softened its previous forecasts for a rise in unemployment, which it expects to stand at 4.7% this year, still above the level it considers inflationary.

The ONS said workers’ total earnings including bonuses rose by an annual 2.4% in the first quarter of 2017, edging up from growth of 2.3% in the three months to February.

The Bank expects wages to rise by 2% this year before picking up in 2018 and 2019, though it has forecast a stronger outlook in all of the last seven years only to be proved overly optimistic.

The ONS said the number of unemployment benefit claimants rose by 19,400 to just under 793,000 in April, slower than an increase of 33,500 in March.