Alastair Hatchett | 16 Nov 2021

Earnings growth at 5.8% as temporary upward effects wane

Average weekly earnings grew by 5.8% in the year to September on the total pay measure for the whole economy and by 4.9% on the regular pay measure, which excludes the effects of bonuses. These figures are down on the year to August when total pay growth was 7.2% and regular pay growth was 6.0%.

Higher growth rates in previous months had been largely the consequence of the collapse in earnings growth during the first period of the pandemic in 2020. The year-on-year effects of a lower base last year pushed up the annual growth rates of earnings in 2021. However, these temporary pandemic effects have been reducing. For September 2021 the ONS says that base effects are minimal for most sectors, except for construction and for wholesaling, retailing, hotels and restaurants, where base effects are inflating the rates of growth slightly.

Pre-pandemic, average weekly earnings were growing at around 3% to 4%, with few inflationary pressures. Now the prospects are rather different. Pay settlements are around the 2% to 3% level but exceptional increases for shortage occupations may be driving average earnings higher. Further ahead, a combination of rising inflation and a buoyant labour market, as evidenced by the latest increase in payroll employment and record numbers of vacancies, could sustain a continued positive gap between basic pay awards and average earnings growth. If pay settlements were to rise as a result of higher inflation and staffing issues, this would also produce upward pressure on earnings growth.   

One industrial sector with exceptional average earnings growth is finance and business services. The rate of growth in the year to September here was 9.1%, down from 11.1% in the year to August. In this sector there appears to be little workforce composition or base (2020) effects on earnings, but clearly some employees in the sector are reaping higher rewards alongside a resumption of bonuses as the economy has recovered somewhat.

Meanwhile, the rate of growth in average earnings in manufacturing was 4.0% in the year to September, down from 5.4% in the year to August. In construction the rate of growth was 6.3%, down from 9.7% in the year to August. In the largest industrial sector, that of wholesaling, retailing, hotels and restaurants, the rate of growth in earnings was 6.0% in the year to September, down from 7.6% in the year to August.

Overall, earnings growth in the private sector was 6.6% in the year to September, down from 8.3% in the year to August. By contrast, earnings growth in the public sector was much lower, showing at 2.4% in the year to September, down from 2.6% in the year to August and 2.5% in the year to July. Here the lifting of the pay freeze imposed by the Treasury in 2021 may bring higher earnings growth in 2022.