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OPINION

UK gets a pay rise

UK gets a pay rise
January 22, 2015
UK gets a pay rise

This, said Peter Spencer at the EY Item Club, will give consumer spending "a major shot in the arm". He expects real GDP growth to accelerate this year to 2.9 per cent, after 2.6 per cent growth last year.

But some economists doubt how much real wages will rise this year. One reason for this is that productivity is still growing slowly. This week's figures showed that total hours worked rose by 0.5 per cent in the three months to November. With the NIESR estimating that GDP grew by 0.7 per cent in this period, this implies productivity growth of just 0.2 per cent - still well below the pre-recession trend rate. Low growth in productivity means that companies cannot afford big pay rises.

There's also doubt about how much bargaining power workers have. Although this week's figures show that unemployment has fallen to 1.91m, there are a further 1.3m people working part-time who'd like a full-time job and another 2.3m who are not in the labour-force who want a job. This is an excess supply of labour equivalent to 13.6 per cent of the working age population, which might continue to hold down wages.

All this matters because unemployment and productivity are bigger influences on real wages in the long run than price inflation. In fact, minutes of the latest Monetary Policy Committee meeting released this week showed that members fear that low inflation now will reduce inflation expectations and so hold back pay settlements. If this happens, rising inflation later this year could reduce real wage growth.

These uncertainties about wage growth mean that many economists don't expect an interest rate rise for a long time. Chris Williamson at Markit says that an increase before 2016 is "only a remote possibility".