Pay increases remain depressed

Pay increases have slowed considerably since the UK entered recession, according to the Economic Review published in today's Economic and Labour Market Review, although they have picked up a little of late.

Regular earnings (that is, not including bonuses or arrears) in January-March 2010 were 1.9% up on the same period the previous year.

However, between January 2006 and June 2008 the average annual rate was 4.1%. It was never lower than 3.5%.

The review comments the slowdown in earnings growth is a natural response to the recession.

Employers facing falling profits and smaller cash flows are less able to fund pay rises, and workers facing a weakened labour market and growing unemployment are more likely to show pay restraint in order to preserve employment.

It has been suggested this is one of the reasons why unemployment has not, so far, risen to the extent feared.

The review also looks at pay comparisons between the public and private sectors, using data ONS publishes as part of its Average Weekly Earnings series.

This shows how much of the headline change is due to pay rises and how much is due to the changing composition of the workforce – a particularly important factor here since some banks, a higher-paid sector of the economy, were reclassified from the private to the public sector following the bail-outs.

Isolating the pure wage effect from this, it shows that in recent months average wage growth has been fairly uniform between the public and private sectors.

Although it appears that wage growth initially slowed faster in the private sector as a result of the recession. Wage growth was also faster in the private sector in the period leading up to the recession, suggesting wage growth is less sensitive to the economic cycle in the public sector than in the private sector.