Why British workers’ pay squeeze will last even longer than previously feared
Tim Wallace
5 min read
workers london - Jose Sarmento Matos/Bloomberg
Staff at Virgin Money are getting an extra £1,000 to help with the cost of living, in the latest example of companies boosting wages as inflation soars to a four-decade high.
The one-off bonus is being handed to all Virgin Money workers who earn less than £50,000 per year, and comes on top of a 5pc pay rise offered at the start of the year.
Santander, meanwhile, is giving an extra 4pc pay rise to all staff earning below £35,000, in a similar recognition that rampant inflation is trashing the value of pay packets.
But welcome as they are to hard-pressed employees, these efforts also show the limits of even the largest businesses to keep up with an unexpected explosion in prices. Wage growth is starting to fall alarmingly behind.
Consumer prices have already soared more than 9pc on the year and are predicted to accelerate further. When the household energy price cap goes up again in October, inflation is expected to peak at around 11pc.
Very few workers can say the same about their earnings. Average pay in the three months to May was up 6.2pc, according to the Office for National Statistics. In May, however, pay growth slowed to 3.9pc, its weakest since last November.
After inflation, regular pay dropped 3.7pc in the three months to May, compared to last year. Including bonuses, it is down 1.9pc.
Jake Finney, economist at PwC, says: “in real terms, regular pay levels are only marginally higher than they were prior to the global financial crisis. The average worker, therefore, has seen little upward movement in their pay for almost fourteen years.”
The worry now is that pay packets will continue to fall behind prices.
Businesses are running low on cash to hand to staff, meaning short-term measures to support earnings are fading. Inflation appears to be worsening and will be more prolonged than anticipated, piling more pressure on businesses and households.
In the long-term, higher pay tends to rely on workers being more productive — yet companies are short on the funds and the time needed to undertake investment and training, imperilling hopes of a productivity recovery.
While bonuses are undoubtedly extremely helpful, they are generally only one-off in the face of a longer-term problem.
The handouts have become an increasingly common way to attract or retain staff, allowing companies to show generosity without locking in permanently higher costs in the form of increased salaries.
Sign-on awards to new lorry drivers, for instance, became common last year when companies struggled to get the workers they needed, before spreading through sectors earlier in 2022.
In almost every month over the past 12 months, bonuses jumped by at least 16pc on the year in an unprecedented frenzy of payouts which, crucially, helped prop up pay in the face of inflation.
But that boom in awards faltered in May. Bonuses were down almost 9pc on the year, in a sharp reversal.
This is a major contributor to a slowdown in overall pay rises. Far from the much feared wage price spiral, in which pay packets chase prices, pushing inflation higher, workers are struggling to make much of a dent at all in rising bills. In the private sector, regular pay is up only 5pc, and in the public sector, less than 2pc.
Business groups say that at the start of the year, companies expected to have to increase pay packets — acknowledging both rising living costs and the extremely tight jobs market, with unemployment touching lows last reached in the mid-1970s and a record number of job vacancies.
But the scorching pace of inflation has instead exhausted their resources.
“At start of the year more people were confident they would be able to say, let’s try and offer the best pay rises that we can, more than we would have done otherwise, and then pass those costs on through prices to our customers,” Matthew Percival at the CBI told the BEIS committee.
“But now we are seeing a lot more businesses saying, actually we are worried if we pass those costs on, our customers won’t be able to afford them, and therefore it begins to put the size of the business at risk.”
Stephen Phipson, chief executive of manufacturers’ group Make UK, told MPs “it is getting increasingly difficult to pass those costs on” to customers, due to things including greater pay costs or rising energy bills, making it harder in turn for bosses to offer higher wages to staff who are requesting a second pay rise this year on top of their annual increase in the spring.
As inflation accelerates and appears likely to last longer than economists had anticipated, it threatens a prolonged squeeze on families’ pay packets.
City economists expect inflation to rampage through the economy at more than twice the Bank of England’s 2pc target until at least the dying months of 2023.
Higher productivity is key to increasing pay in real terms on a sustainable basis: if workers each produce more output, companies can affordably increase pay without raising inflationary pressures in the economy.
Companies can boost productivity through higher investment in physical capital and training their staff.
“Without improvement in this the economy will struggle to generate sustained increases in real pay, even if the employment picture remains positive,” says Len Shackleton at the Institute of Economic Affairs.
Unfortunately, business investment plunged during the pandemic, dropping by almost 20pc in the second quarter of 2020. It has since recovered, but remains around 7pc below its pre-pandemic level.
CBI’s Percival said companies struggle to find the time to let their hard-pressed workforce go off for training, while Jane Gratton at the British Chambers of Commerce told MPs rising inflation means companies have little money to spare for investment.
She said: “75pc of businesses are looking at reducing their investment plans.
“There are some very serious warning signs out there. There is a very large number of businesses that are struggling to maintain normal operations. The labour costs on top of all the other costs are fuelling into their prices.”
With inflation continuing to soar, and pressures not alleviating anytime soon, workers would be wise not to count on a big pay rise or even a bonus top-up any time soon.
