Recent data on UK wage growth is presenting significant challenges for both Bank of England Governor Andrew Bailey and Prime Minister Keir Starmer. New figures from Reed Recruitment indicate that the long-standing decline in wage growth has not only halted but has begun to reverse. In the three months leading up to July 2024, wage growth reached its highest level this year.
For Bailey and the Bank of England (BOE), these findings complicate the recent narrative of cooling wage pressures. After cutting rates from a 16-year high on August 1, BOE officials may now need to reconsider their approach to further rate reductions. The resurgence in wage growth could eventually be reflected in official data as these job postings are filled, potentially forcing the central bank to maintain a cautious stance on easing monetary policy.
For Prime Minister Starmer, the uptick in wages underscores the difficulties his Labour government faces in addressing severe staff shortages, which could hinder his administration’s ambitious goal of raising the UK’s growth rate to 2.5% annually. Many businesses are still compelled to offer substantial pay increases to attract the talent they need, particularly in sectors plagued by persistent skill shortages.
“Our data shows that wage growth is concentrated in sectors with chronic skill shortages that also require in-person attendance, such as construction, engineering, education, and hospitality,” said James Reed, CEO of Reed Recruitment. “While persistent wage inflation poses challenges for the BOE, it also highlights deeper structural issues that will complicate the Labour government’s focus on economic growth. The challenge lies in finding enough skilled workers to sustain that growth.”
The Reed data, which tracks both publicly advertised and undisclosed salaries, emerges just a month after BOE policymakers narrowly decided to reduce rates, banking on the assumption that inflationary pressures were beginning to ease. Growth in advertised salaries had cooled throughout 2023 after peaking at 7.2% on a three-month annualized basis. However, this trend reversed in recent months, with wage growth climbing back to nearly 4%.
Although the official measure of regular wage growth has remained stable at 5.4% for the three months leading up to June, the Reed data—a leading indicator of wage trends—echoes recent observations by the BOE’s regional agents, who also reported an uptick in wage pressures.
The Reed report further suggests that wage costs in the critical services sector are likely to continue rising. The BOE has been closely monitoring services inflation as an indicator of domestic economic pressures, with prices in this sector increasing by more than 5% annually, even as headline inflation has hovered near the 2% target in recent months.
In sectors struggling with severe labor shortages, wage increases have been even more pronounced. For example, in the hospitality and catering industry, salaries surged by over 30% in the three months to July compared to the previous year, marking the highest increase across all sectors. Customer service wages also saw significant growth, increasing by more than 9%.
“Employers are currently finding it challenging to fill vacancies in sectors where skill shortages are acute,” Reed added.
BOE policymakers are expected to maintain interest rates at 5% in their upcoming meeting this month. However, market expectations include a potential rate cut in November, with a 60% likelihood of an additional reduction by year-end. These expectations may be tempered if official wage data begins to show stronger-than-expected growth. According to James Smith, a developed markets economist at ING, robust wage growth is a primary reason for the BOE signaling a gradual pace of rate cuts. However, he noted that policymakers might find some reassurance in the Reed data, as wage growth remains below the 4% threshold.
“The ongoing debate between hawkish and dovish policymakers now centers on the extent of the ‘catch-up’ in wage growth—essentially, the ability of workers to recover lost real incomes over the past few years,” Smith explained.
