Ryan FowlerA new study by the Resolution Foundation suggests that recent gains in UK wage levels have not been driven by increased productivity, which could indicate that these gains are unsustainable.
Over the past year, real average weekly regular earnings in the UK increased by 2.1%, marking a significant recovery from a 2.7% decline in the preceding year. This growth occurred despite a 0.6% fall in productivity from Q4 2022 to Q4 2023.
The report attributes the uncharacteristic rise in real wages primarily to falling pension costs and a reduction in import prices, rather than improvements in worker output.
Employers have seen a decrease in social contributions by 2.4% of wages, equating to about £20 billion, largely due to reduced obligations towards Defined Benefit pension schemes as interest rates have climbed.
Additionally, a reversal in the terms of trade shock experienced during the recent cost of living crisis has led to a 2.9% decrease in import prices over the past year, enhancing the purchasing power of UK firms and consumers without corresponding productivity improvements.
Greg Thwaites, research director at the Resolution Foundation, cautioned that this wage growth, though welcome, might not persist. “Without a revival in productivity, these wage increases could lead to higher inflation if businesses pass on increased costs to consumers,” he explained. The Foundation warns that unless productivity improves, the current wage growth may need to taper off or contribute to prolonged inflationary pressures.
