The United Kingdom’s newly established Labour government, emerging triumphantly from a landslide electoral victory, has set an ambitious course to restore the nation’s economic preeminence. The latest data on worker pay growth provides a robust foundation for achieving this goal.
According to the Indeed Hiring Lab, wages in the U.K. rose by an impressive 7% in the year leading up to June. This rate of increase is nearly double that of the Eurozone, where wages saw a 3.7% rise, and more than twice the 3.1% growth observed in the United States.
These wage growth figures contrast with the broader economic forecasts for these regions. The International Monetary Fund (IMF) predicts that the U.K.’s economy will expand more slowly than those of the Eurozone and the U.S. this year.
A key factor contributing to the U.K.’s robust wage growth is the significant increase in the National Living Wage, the mandated minimum wage for employees over the age of 21.
The U.K. government has committed to maintaining the National Living Wage at two-thirds of the median wage, in accordance with the Low Pay Commission’s recommendations. This strategy aims to protect workers from falling into relative poverty.
Reflecting inflation adjustments and private sector wage growth, the National Living Wage saw a 9.8% increase in April, marking its third-largest rise since its inception in 2016. The pay increase for younger workers aged 16 to 20 was even more substantial.
The national minimum wage, introduced by Tony Blair’s Labour government in 1999, has surged by 70% since its establishment. In contrast, the median wage has grown by approximately 20% in the same period, indicating a reduction in wage inequality within the U.K.
The Low Pay Commission estimates that about 1.6 million individuals were earning at or below the minimum wage as of April last year. Consequently, increases in the minimum wage can significantly impact overall wage growth.
The Indeed Hiring Lab highlights that the National Living Wage has been a major driver of the U.K.’s rapid wage growth, though it is not the sole factor.
Pawel Adrjan, head of EMEA research at Indeed Hiring Lab, stated, “Strong wage growth across all pay ranges suggests that the UK’s National Living Wage increase of 9.8% on April 1st isn’t the sole driver behind rising wage growth, but it is having a lasting impact on lower-paid salaries, alongside sector-specific labour demand.”
Labour plans to eliminate age-specific bands within the national minimum wage structure, potentially providing an additional boost to lower-paid occupations.
Moreover, Labour intends to broaden the Low Pay Commission’s remit to include considerations of the cost of living, paving the way for even more substantial increases in the National Living Wage in the future.
Inflation Challenges
While workers are likely to welcome the rise in wages, this development poses a challenge for policymakers eager to reduce interest rates. The Bank of England has maintained its base rate at 5.25% for nearly a year to combat rising prices.
The consumer prices index (CPI) achieved the Bank of England’s 2% target in May. However, the central bank anticipates a resurgence in inflation during the third quarter, prompting them to delay rate cuts.
As the U.K. contends with these inflationary pressures, it risks lagging behind the Eurozone, where the European Central Bank (ECB) implemented a rate cut in June, becoming the first major central bank to do so.
Any indication of accelerating wage growth in the U.K. may cause the Bank of England to reconsider its cautious stance on interest rates, potentially delaying any planned reductions.