The link between productivity and wage growth has been temporarily severed due to falling pension costs and import prices, a report by the Resolution Foundation reveals.
The think tank highlighted that this unusual trend has permitted real wages to increase without exacerbating inflationary pressures.
However, the Resolution Foundation warns that this period of “unproductive wage growth” is not sustainable.
Despite a decline in productivity by 0.6 percent over the past year, the UK has witnessed a surprising pay recovery, with real average weekly regular earnings climbing by 2.1 percent up to February, the report notes.
Greg Thwaites, research director at the Resolution Foundation, commented: “After 16 years of wage stagnation, real pay packets in Britain are growing again at a healthy two percent.”
He added, “This welcome turnaround is all the more remarkable given that output per worker the ultimate driver of rising wages has actually fallen.”
Thwaites explained that the recent boost in real wages is largely attributable to the reversal of trends that previously diminished pay during the cost-of-living crisis, such as “Falling import prices have boosted our purchasing power, while rising interest rates have allowed firms to redirect pension deficit contributions into pay packets.”
“But while this welcome real wage recovery has been affordable so far, it won’t be in the future. Unless productivity picks up, wage growth will peter out, or pay rises will simply be passed on through higher prices and prolong our inflation problems.”
