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Explaining Wage Growth

Explaining Wage Growth - Pound

You’ve probably heard it in the news before. Wage growth. Usually it’s tied to a report about inflation or employment. But was it is, how is it tied to inflation, and why does it matter anyway?

What is wage growth?

Explaining Wage Growth - Credit Card Machine

In short, wage growth takes into account the average weekly pre-tax earnings and bonuses of those in the UK. It looks at how much we’re all earning, compared to how much things cost.

That gives economists a fair idea of judging living standard across the country. It’s the reason why it might feel like you’re getting paid less, even if your salary hasn’t actually changed.

We only have to look to previous months and years to see that wage growth is anything but static. In the three months leading up to February 2017, for instance, we saw wage growth rise 2.3% year-on-year.

That means we earned, on average, £494 per week more before tax. Indeed, while wage growth slumped to a record low of -2.90 in April 2009, February 2007 saw it hit a peak of 6.60%.

The eagle-eyed among you will spot that it was 2007-2009 that saw the global recession hit – at that point, not only did wage growth fall, but inflation rose to almost its highest level since 2006.

How does inflation affect wage growth?

Explaining Wage Growth - Fruit and Veg

Wage growth and inflation are inextricably linked – while it’s good if your wages are rising by, say, 3%, it becomes bad news when inflation is rising higher than that.

That’s because it means that we just can’t afford to buy what we could. And what we’re seeing now is that inflation is on the rise, to the point where it’s caught up and overtaken real wages.

Currently, wage growth is 2.2%, while inflation (the price things go up by) is at 2.3%. Bad news, then, for consumer since it means their ‘purchasing power’ is weakened.

And that, in part, explains why consumer spending is down – shoppers are choosing the essential, necessary purchases like food and petrol for the car; the things they must buy to get by, while declining to buy so-called luxury items; expenditures they don’t feel they can afford.

What causes wage growth to change?

Explaining Wage Growth

So, what causes wage growth to contract and expand? A lot relies on how well businesses are performing, so if production costs are on the rise (due to inflation, for instance), then employers are less likely to increase wages or even employ people – and that influences average wages.

It can also vary depending on the types of employees entering the jobs market: If those on low wages flood the market, or if high-wage earners leave, the effect is to drive down the average wages earned.

And while inflation and the jobs market are two of the main drivers of wage growth, we drill down further to see the primary reasons why your pay feels like it’s going up or down:

  • How profitable a business is – can it afford to invest in its workforce?
  • How much it costs to pay employees – is there a set minimum wage; what do similar roles pay?
  • What sales and business prospects exist in the industry – can the business remain profitable?
  • How many potential employees exist in the jobs market – is there high unemployment rates?
  • What inflationary trends are seen across the economy – is it likely to rise; will the Bank of England work to halt a rapid increase?

Despite inflation currently outpacing wage growth, financial experts, economists and even the Bank of England, are expecting this to change.

True, the Bank of England trimmed its growth forecast down by 0.1% for 2017, but they also revised its growth forecast upward for both 2018 and 2019. So, it might not be all bad news for your wages in the future.

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