News Column

Wage inflation and rate rises? We'll believe it when we see it

July 27, 2014

The timing of the first interest rate rise in more than five years will depend on how many workers get a decent wage rise. Bank of England rate setters let it be known at their last meeting that inflation-busting pay is a key indicator of an economy's health, and a trigger for higher rates.

Optimists believe that, after six years of falling real incomes, workers are due an above-inflation rise. So far it hasn't come, but they argue that staff shortages will soon translate into higher pay.

As the Bank's regional agent network recently reported, the UK is facing the worst recruitment difficulties since the beginning of 2008. Recruitment agencies are also recording record rises in starting salaries for new employees. So wages are on the up. Are interest rates too? The flipside of this argument can be found in the minutes from July's MPC meeting.

Officials said a halving in average weekly earnings growth to 0.7% in the three months to April, from 1.4% in the three months to January, could reflect a trend for new jobs to be "concentrated in lower-paid sectors". It added: "Perhaps relatedly, recent employment growth had been more heavily skewed towards lower-skilled occupations."

Rate setters also worry about self-employment, up by 700,000 since 2008 and accounting for more than two-fifths of job creation in this parliament. Many new members of this 4.5 million-strong sub-group are redundant public sector workers picking up contract work. Then there are the 100,000 or so construction workers who have probably rejoined the ranks of the self- employed. It is a mixed bag of people, some of whom could see their incomes rocket as the economy recovers, and others who won't.

George Osborne said last week he expects a bumper tax take in January when the self-employed pay their contributions. He may be right. But it may not be all they are paying. Higher mortgage payments could be another hit on their bank account soon.

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Source: Observer (UK)

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