Listen to executives in the City of London and you’d think Britain is the poor cousin of America – a growing number of FTSE chiefs are blaming London’s stock market woes on low pay in comparison to the US.
But official data suggests that, for the average worker at least, pay growth in the UK is far outpacing the US.
Wages in March grew by 6pc, according to the Office for National Statistics (ONS), beating forecasts from economists.
That was much greater than 4.5pc seen in the eurozone and better even than the 4.7pc annual pay growth in the US in March, according to the Atlanta Fed.
Figures from Indeed, the recruiter, show advertised salaries are accelerating in the UK even as they slowed in the eurozone.
Real wages have risen by more in 12 months than they did in the previous 16 years, according to the Resolution Foundation. Regular wages are 2.4pc higher than they were a year ago after accounting for inflation.
The recent move by Goldman Sachs to scrap the cap on bankers’ bonuses in the UK – and the expectation that rivals will follow – suggest rewards may keep getting richer.
Strong pay growth in part reflects Britain’s newly resurgent economy. Growth topped the G7 in the first quarter of the year, well outpacing the US.
However, the country still has a lot of catching up to do: average real pay is still 2.4pc below where it was three years ago, with workers suffering long-lasting scars from the cost of living crisis.
British workers also still earn far less than their US counterparts. The typical American earned $77,500 (£61,570) in 2022, according to the OECD, compared to $54,000 for the average British worker. In Germany, the figure is $58,900, while France is a touch lower at $52,800.
However, strong wage growth is not necessarily good news. The Bank of England fears high pay rises risk fuelling inflation. Huw Pill, the Bank’s chief economist, has suggested that interest rates may have to stay higher for longer.
Britain’s economy is therefore potentially closer to America than Europe – but for the wrong reasons. While the European Central Bank is near to cutting rates, the Federal Reserve is struggling to make sure inflation has been fully conquered in the face of strong economic growth.
Why then is Britain confronting this cocktail of strong pay growth and potentially persistent inflation while it eases in the EU?
One reason is unemployment: it is significantly lower in the UK than that in the eurozone, pointing to a tight jobs market that keeps wages high. At the turn of the year unemployment stood at 6.5pc in the eurozone, well above Britain’s 3.8pc or the 3.7pc in the US.
Workers are quite happy to use the power that gives them to demand more money.
A wave of inactivity is keeping the jobs market tight in Britain. There are 9.38m adults of working age who are neither in a job nor looking for one. That is up by just over one million since the eve of the pandemic. Of these, 2.8m are long-term sick – up by more than 700,000.
Then there is Brexit. While it has not not interrupted migration – if anything, inflows into the UK have risen sharply – the type of workers coming here may have changed since the end of free movement.
George Buckley, economist at Nomura, says: “It could be that those coming in from Europe were low-wage and they were acting to reduce pay pressures in parts of the economy, whereas these people could be a different mix.”
This would help to explain why supermarkets have been forced to repeatedly raise their base pay in recent years to entice workers.
While Britain might be closer to the US than the EU at the moment, the structure of the jobs market is very different.
For one thing, the mandated minimum wage in the UK is far higher – at £11.44 for anyone over 21 compared with $7.25 (£5.75) in the US and just $2.13 for tipped workers, although some states have a higher minimum.
There is also a greater proportion of employees on the minimum wage in Britain, meaning the recent 10pc increase in April has a bigger impact on official pay data than it would in the US.
Around 5pc – or 1.6m workers – are paid the minimum wage in the UK, compared with 1pc in the US.
The Bank of England believes workers in “consumer-facing sectors”, such as retail, will see pay deals averaging 7pc in 2024, driven “overwhelmingly” by increases in the minimum wage.
The UK’s public sector workforce is also much larger than America’s, accounting for around one in five employees compared to one in seven in the US.
The number of workers in the British public sector has grown from 5.6m to 5.93m since the pandemic, including 300,000 more in the health service.
The public sector has driven much of the growth in Britain’s workforce last year. Higher pay awards here are the main factor behind the Bank of England’s sizable upgrade to overall wage growth forecasts this year, from 4pc to 5.25pc.
However, continued rapid pay growth in the public sector appears to be unsustainable. The Treasury wants to constrain public sector pay deals this year and the sector’s dismal productivity performance is set to continue.
Employment in the private sector, by contrast, has fallen from almost 27.6m pre-pandemic to just over 27.2m.
The Bank of England continues to believe pay deals across the economy will average 5pc this year, cooling from the current rate of 6pc.
This reflects the fact that workers in “non-consumer facing sectors” are expected to see average pay rises closer to 4.5pc.
More than 40pc of pay deals are done in April, according to figures compiled by XpertHR, and it is likely that policymakers will want to see these figures before deciding on whether to vote for a rate cut in June. Companies settling later this year are expected to offer “materially lower” pay rises, the Bank believes, as inflation cools.
As with the US, interest rates decisions are on a knife edge, posing a headache for the Bank of England.
But for the average worker seeing extra cash in their pay cheque, such considerations may mean little. Enjoy the good times – while they last.
Source Agencies
