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Real wage squeeze continues - for now

Ben Brettell, Senior Economist, Hargreaves Lansdown:

The ONS’s labour market report is in danger of sounding like a cracked record at present: employment, record high; unemployment, record low; wage growth, lacklustre.

In theory, with unemployment so low, sooner or later demand for labour will outstrip supply and workers will be able to demand higher wages. But the number of job vacancies also hit a record high, signalling that employment could increase further before an imbalance of supply and demand starts to push wages up at a more meaningful pace. There also seems to be a more fundamental shift in the labour market, with new technology and global competition both weakening workers’ bargaining power. It looks like low wages now explain low unemployment, rather than low unemployment acting as a catalyst for better pay.

With pay growing at 2.5% and inflation running at 3.0%, the squeeze on real wages continues for the ninth consecutive month. But with inflation seemingly set to fall back towards the 2% target, this looks like it’ll come to an end in the next few months. We should remember, however, that the only true driver of real pay growth and rising living standards is productivity growth. This is something the UK has struggled with since the financial crisis, and as yet nobody seems to have solved the puzzle.

Economists now turn to Friday’s first estimate of fourth-quarter GDP growth. The concern is that the consumer squeeze will start to feed through into lower economic growth.