Britain’s pay squeeze is set to get worse before it gets better next year, and public expectations appear to be moving in line with experts’ pessimistic predictions, according to the Resolution Foundation’s latest Earnings Outlook.
The outlook uses ONS and OBR data to forecast that 2018 will mark the end of the pay squeeze that returned this year, but not the start of a meaningful recovery in pay packets, as real wage growth is set to be zero over the year as a whole.
The Foundation projects a tightening of the pay squeeze in data released at the start of 2018, with no noticeable wage growth until the end of the year.
While zero real wage growth would make 2018 worse than any year in the three decades running up to the financial crisis, it would make it better than average for post-crash Britain.
And while expert predictions have gone out of fashion in recent years, Resolution Foundation analysis of new Bank of England data shows that public expectations for 2018 are equally pessimistic.
It notes that over a quarter (27 per cent) of working age households expect their financial situation to worsen in the coming 12 months, roughly the same as the proportion who think it will get better (28 per cent). Over a third of the poorest households think their situation will worsen (35 per cent), compared to just one in six of the richest households (17 per cent).
Looking at prospects for wider household income growth in 2018, the Foundation says that this will largely depend on what happens to pay packets as Britain’s astounding five-year jobs boom looks to have finally run out of stream. Beyond the labour market, ongoing benefit cuts will also play a big part in living standards prospects for millions of low and middle income families.
The Foundation’s outlook also highlights some reasons for optimism. The lowest paid workers are set for a pay rise of 4.3 per cent in April as the National Living Wage reaches £7.83. A surprisingly large fall in hours worked this autumn also implies a pick-up in productivity growth to 1.2 per cent in the three months to October. This is stronger growth than seen in any quarter since the end of 2005 and, if sustained, is likely to herald pay rises to come.
Looking back on the labour market story of 2017, the Earnings Outlook points to other positive trends that it hopes will continue in 2018. These include:
- Falling pay inequality, driven by the ramping up of the National Living Wage. This fall was strongest in Northern Ireland – where the gap between the top and bottom 10 per cent of earners fell by 13.4 per cent – and weakest in London (where it fell by just 3.5 per cent).
- Strong employment gains for disadvantaged groups. The UK’s jobs boom between 2012 and 2017 was particularly good for disadvantaged groups. Labour force participation increased by 1.8 per cent for all workers (aged 18 to 69), but increased by 9.4 per cent for single parents, 6 per cent for older workers (aged 50-69), and 5 per cent for disabled workers.
Torsten Bell, Director of the Resolution Foundation, says: “2017 was a tough year for living standards as the pay squeeze returned. The good news is that things will get better next year. The bad news is we may only go from backwards to standing still, with prospects for a meaningful pay recovery still out of sight.
“And while the public have famously defied recent gloomy economic predictions and continued to spend, public expectations do appear to be moving in line with experts’ pessimistic predictions. Over half expect no pay rise next year and households are just as likely to expect their financial situation to get worse as improve next year. This pessimism is strongest among those on lower incomes, unsurprisingly given big benefit cuts set to take place.
“Of course predictions are almost always wrong. But it matters a lot in what way they are wrong. Ongoing pay rises for the lowest earners, record employment levels and potentially stronger productivity growth in recent months provide some grounds for optimism. But before we get carried away it’s worth remembering that the OBR’s main forecasting problem on pay has actually been excessive perkiness.
“Let’s hope we live up to the Chancellor’s exhortations after the Budget to ‘prove the forecasts’ wrong, otherwise we risk a standstill year for pay packets across Britain.”