Wages in Britain have dropped in real terms for the first time in almost three years as employers remain reluctant to offer bigger pay rises in spite of the acceleration of inflation.

The jobs market was otherwise robust with record employment rates and the lowest unemployment since 1975, official data showed.

But the renewed squeeze on Britons’ living standards marks a turning point for the UK economy: real wages fell sharply after the financial crisis but had been recovering slowly in recent years.

“Coming so soon after the big post-crisis pay squeeze, this new phase of falling pay means that this decade is set to be the worst in over 200 years for pay packets,” said Stephen Clarke, an economic analyst at the Resolution Foundation think-tank.

The latest official forecasts suggest the average UK worker will still earn less in 2021 than they did in 2008. Inequality is also expected to increase in the next few years because the benefits that top up the incomes of low-paid workers have been frozen in cash terms.

The labour market has become a key battleground in the general election campaign. Both the Conservatives and Labour have promised to boost low pay and strengthen workers’ rights.

Average regular weekly pay in the three months to March was 0.2 per cent lower than a year ago after taking account of inflation. Regular pay (excluding bonuses) rose 2.1 per cent, slightly less than inflation in the same period. Total pay (including bonuses) rose slightly faster than inflation.

Inflation subsequently accelerated to 2.7 per cent in April, which suggests the squeeze on pay is likely to intensify in the coming months.

The Bank of England recently cut its forecast for average wage growth this year from 3 to 2 per cent, but expects real pay growth to resume next year.

There was better news on job creation as employers continued to hire more staff. The employment rate breached a new record high of 74.8 per cent after another 122,000 people found work — a bigger number than economists were expecting. They were also encouraged by the types of jobs that were created. The number of full-time employees surged while part-time and self-employment fell.

Meanwhile the unemployment rate dropped to 4.6 per cent, the lowest since 1975.

“Robust employment growth helps to reassure that, although the consumer [spending] will continue to weaken, it is not all doom and gloom,” said Alan Clarke, an economist at Scotiabank.

Still, employers’ refusal to raise pay has puzzled economists. Workers usually demand higher pay rises when inflation goes up — and their bargaining position should be strengthened by the tightness of the labour market. The same puzzle is playing out in Japan, the US and Germany, where unemployment is similarly low but wages remain weak.

The UK economy at a glance A one-stop overview of the key UK economic data, including GDP, inflation and unemployment

Employers say they cannot raise pay sustainably unless workers become more efficient. Yet productivity — which has stagnated in the UK since the financial crisis — fell 0.5 per cent in the first quarter of the year as workers produced less output for every hour they worked.

Productivity has slowed in most countries since the financial crisis, but the trend has been particularly acute in the UK.

Some economists believe the weakness of wage growth is also the result of structural shifts that have left workers with less bargaining power.

“A shift towards less secure forms of employment, the tightening up of eligibility for benefits and the consequences of globalisation have all made workers more compliant and less willing and able to push for higher wages,” said Martin Beck, an economist at Oxford Economics.

Others believe that migration from the EU has provided a “pressure valve” that means employers have not had to raise pay. The number of workers in Britain from the EU rose unexpectedly in the three months to March after a fall in the previous set of data. Their ranks increased by 171,000 to 2.32m in spite of the increased uncertainty about the future caused by the vote for Brexit last June.

Letter in response to this article:

A risky time to drive down productivity / From Grzegorz Pytel, Teddington, Middlesex, UK

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