Pay squeeze intensifies as wage growth falls further behind inflation

Britain is experiencing a rapid decline in living standards with the biggest squeeze in workers’ pay since 2014, according to the latest official data.

Regular pay adjusted to account for the impact of inflation fell by 0.6% year on year in the three months to April. It was the weakest data since the summer months in 2014, according to the Office for National Statistics. The decline followed a 0.4% drop in the three months to March.

Trade unions reacted with dismay to the figures. Frances O’Grady, general secretary of union umbrella body the TUC, warned that Britain was heading for a fresh crisis in living standards.

“Real wages have fallen for the second month in a row. Unless the government gets its act together, we’ll soon be in the middle of another cost of living crisis,” she said.

“Ministers must focus on delivering better-paid jobs across the UK. And it’s time to bin the artificial pay restrictions on nurses, midwives and other public sector workers. Britain needs a pay rise, not more pressure on household budgets.”

Len McCluskey, general secretary of Britain’s biggest union, Unite, said millions of workers were struggling to make ends meet. “The Tories have succeeded in creating the longest period of falling real terms pay since the Napoleonic wars. They are clearly the party of economic mismanagement.”

When adjusted for inflation, UK employees are now earning £15 less a week after tax and deductions than they were in March 2008, six months before the collapse of Lehman Brothers and the global financial crisis.

The latest drop in real wages reflects mounting pressure on household budgets, as the sharp drop in the value of the pound since the EU referendum drives up the cost of goods imported from abroad and feeds through to higher shop prices.

The ONS said that before inflation, regular pay growth excluding bonuses slowed to 1.7% year on year in the three months to April. It was much weaker than the 2% growth in pay that had been expected by economists.

Pay growth for the three months to March was also revised down sharply to 1.8% from a previous estimate of 2.1%, underlining the pace at which a drop in living standards is taking hold.

Prices were rising at a faster rate, with inflation at 2.7% in April, and jumping to 2.9% in May according to ONS data published on Tuesday.

The fall in real pay comes despite an employment rate which held 74.8% in the three months to April, the highest since records began in 1971. The number of people in work rose by 109,000 to 31.95 million.

Meanwhile the unemployment rate was unchanged at a 42-year low of 4.6% and the number of unemployed people fell by 50,000 to 1.53 million.

“The terrible news on pay comes despite another strong jobs performance, with unemployment remaining at its lowest level in over 40 years,” said Stephen Clarke, economics analyst at the Resolution Foundation thinktank.

“The sharp contrast between our terrible record on pay and strong jobs performance shows that the currency-driven inflation we are experiencing is not feeding through into wage pressures and is simply making us all poorer instead.”

The work and pensions secretary, David Gauke, highlighted the jobs figures.

“This is yet another strong set of record-breaking figures with employment up and unemployment down, fuelled by full-time opportunities. This is good news for families as we continue to build a stronger, fairer Britain.”

But Debbie Abrahams, shadow work and pensions secretary, said Labour was “deeply concerned” that millions of people remain in low paid, insecure work.

Economists are predicting the pay squeeze will accelerate in the coming months, with inflation likely to rise above 3% and as firms limit pay rises as their own costs rise and the economy weakens. The squeeze is expected to weigh on consumer spending, which has been the key driver of economic growth since the financial crisis.

“The UK economy faces a dangerous cocktail of political uncertainty, slowing growth and shrinking real wages,” said Ben Brettell, senior economist, Hargreaves Lansdown.

The weak outlook for consumers and pay is expected to convince policymakers at the Bank of England to look beyond rising inflation – already well above the Bank’s 2% target – and leave interest rates on hold at an all-time low of 0.25% for a prolonged period. Economists at ING bank said policymakers are unlikely to raise rates before 2019.

Neil Carberry, director of employment and skills for the CBI business lobby group, said the government must “put the economy front and centre, create stability and ensure the EU negotiations get off to a positive start”.