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UK pay growth should get a lift in coming months

Article By: ,  Financial Analyst
September 24, 2015 6:36 PM

In coming months, the UK can expect to see strengthening of pay growth, according to a policymaker at the Bank of England.

Ben Broadbent, the deputy governor for monetary policy at the Bank, says that Britain's job-rich recovery has been led by a higher concentration of lower-skilled employment and people new to their roles – but that in the near future, we should see this start to change.

He explained that the rise in low-paid jobs should begin to diminish, and with it, the drag on wages should also lessen.

Compositional effects

"In the past two to three years in particular, the extent of the skew towards low-skilled employment helps to explain some of the weakness of average productivity and pay," Mr Broadbent said during a speech at the Bank.

He added that there was a distinct skew in job creation toward less well paid positions in 2013 and 2014, but that has subsided in the first half of this year.

"While not the only factor [...] this helps to explain why growth of average wages was weak in those two years and has since picked up a bit," he said and noted that the "compositional effects" had knocked around 0.3 per cent off the average wage in 2014.

In comparison, before the recession, these factors increased wages by around 0.7 per cent. Rising education levels contributed to lifting earnings across the pay scale.

Mr Broadbent noted that a tighter labour market and a stronger recovery in the eurozone could help further boost the recovery in pay and productivity. He also highlighted that an influx of workers from overseas had helped to increase the supply of low-skilled labour, but added that there was little evidence to suggest that this dragged down overall pay growth.

"The latest estimates show that the compositional effects have risen during the first half of this year – the skew towards lower-paid jobs had diminished," he said.

Official data released earlier this month showed that average weekly earnings grew by 2.9 per cent in the three months to July. That was up from 2.8 per cent in the three months to June and this demonstrated the strongest increase since the beginning of 2009.

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