Alastair Hatchett | 12 Oct 2021

Earnings growth at 7.2% reflects opening up of the economy

Earnings growth at 7.2% reflects opening up of the economy

Average weekly earnings grew by 7.2% in the year to August on the total pay measure for the whole economy and by 6.0% on the regular pay measure, which excludes bonuses. These figures are down on the year to July when the total pay increase was 8.3% and the regular pay increase was 6.8%. However, what is becoming clearer as the economy opens up more and more, is that higher rates of earnings growth are not just a statistical quirk. There has been an obvious rebound from very low figures at the same time last year, as hours worked have increased significantly since then, coupled with all sorts of pay increases emerging from moves to recruit and retain hard to fill roles.

In more normal times average earnings growth is a combination of the effects from workforce composition changes, hours worked, productivity bonuses, profit-shares and labour market pressures. Annual pay awards can sometimes have a small effect as well. 

Pre-pandemic, average weekly earnings growth was running at between 3% and 4%, with our monitoring of annual basic pay settlements showing these at around 2.5%. So the effect from other elements of pay, which shows up in the AWE series and is sometimes known as ‘earnings drift’, was fairly small at around 0.5% to 1.5%. The situation now is very different, however.

As the base and compositional effects of the pandemic in 2020 unwind in the current period, the ONS’s underlying measure of earnings growth is moving upwards towards the actual measured increases. In the latest release the ONS estimate that the underlying rate of increase (on the regular pay measure) is between 4.1% and 5.6%. Last month the estimate was 3.6% to 5.1%. Each month since it was first reported in the wake of the coronavirus pandemic the ONS has revised this band upwards, and it is now getting closer to the level of the actual increase (6% in the year to August on the latest figures).

Moreover, with annual pay settlements still moderate overall at a median of 2%, though with a higher average and upper quartile reflecting higher awards in some sectors such as retail, the extent of ‘earnings drift’ is now much greater. What appears to be happening is that alongside the waning of ‘base effects’ (connected to the comparison with the lower figures of a year before) and compositional effects due to the earlier loss of low-paid jobs in more traditional areas of retail for example, the increase in hours worked on the one hand, and measures to deal with recruitment and retention on the other hand, are having an effect. Extra pay or bonuses are a current notable feature of the pay landscape in areas as diverse as construction, finance and road haulage, and this is widening the gap between the median annual pay award and average weekly earnings growth. It now stands at between 2% and 4%.

By the end of 2021 or the start of 2022 we should have earnings figures which will be easier to interpret and which will reveal how far post-Brexit and post-Covid labour market pressures have taken earnings growth towards 6% rather than the 3% to 4% we saw pre-Covid. The private sector figure could be higher.

Meanwhile, in the latest figures we can see some of the sectoral differences that lie behind the overall averages. In the year to August, total average earnings in the private sector grew by 8.3% but in the public sector by just 2.6%. There is much less scope for ‘drift’ in the public sector since bonuses are rare and ad-hoc measures to deal with recruitment and retention pressures virtually impossible due to central pay constraints. The sector with the strongest earnings growth is finance and business services at 11.1%. Construction showed at comparatively strong levels too, at 9.7%, while growth in retail, hotels and restaurants is buoyant at 7.6%. Manufacturing growth was a little lower at 5.4% on the total pay measure, and 4.1% on regular pay. This might reflect this sector’s greater input costs.