Average pay growth remains weak and softened in the second year of 2015, according to the Bank of England’s latest inflation report. While some easing in pay growth was projected back in early autumn 2015, as the pick up in wages in late 2014 dropped out of the annual comparison, actual growth for the three months to November 2015 was weaker than expected at 2%.
The Bank of England suggests this weakness is at odds with the continued improvement in other labour market indicators, including sharp falls in unemployment. One factor that may have contributed to the slackening in wage growth is slower productivity growth. The low level of headline inflation, and consequent rise in real wages, may have cut the pressure on employers to increase nominal wage growth. Subdued labour market turnover may also have cut the pressure on employers to raise wages in order to retain all but key staff.
‘It is also possible that, for some occupations, an increased ability to hire people from abroad could have reduced the sensitivity of wage growth to domestic labour market conditions.’
The latest inflation report concludes that the near-term outlook for wage growth is projected to be weaker than at the time of the last report, but may pick up as the factors constraining it start to dissipate.