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Published by: qtipx on Aug 11, 2010
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10/25/2012

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Recent developments

In contrast to strong price inflation, total average weekly
earnings (AWE) wage growth, although higher than last year,
has been subdued in recent months (Table4.B). Within
overall earnings, pay settlements have remained weak, with
increases occurring in the more flexible elements of pay.
Bonuses were particularly strong in Q1. In part, that reflected
bonuses in the financial sector. But, in part, bonuses may also
have been strong because some employers brought forward
bonus payments ahead of the introduction in April of the top
50% tax rate on income. Consistent with that, the data
available so far for Q2 suggest that bonus growth eased.
Reports from the Bank’s Agents suggest that some companies
have paid bonuses instead of higher basic pay, perhaps
reflecting worries about the strength of the recovery.

Earnings growth is relevant for companies’ pricing decisions in
that it affects their costs. Earnings are typically quoted per
person, but labour costs per unit of output reflect changes in
both earnings per employee and labour productivity. During
the recession, employment contracted less sharply than
output, so productivity fell. Productivity growth has
rebounded in recent quarters, more than offsetting rising
earnings growth. So four-quarter growth in unit labour costs
fell in Q1 despite the sharp bonus-related rise in compensation
(Chart4.5).

Influences on wage growth

Companies cut back on flexible elements of pay during the
recession in part by adjusting working patterns to match
weaker demand. In particular, pay bills fell as companies
reduced hours worked. Such downward pressure on earnings
growth may have eased in recent months. Regular pay drift —
the difference between regular pay growth and pay
settlements, which captures changes in earnings related to
working patterns — has picked up a little in recent quarters.
Consistent with that, the rate of decline in average hours has
eased (Chart4.6). As average hours recover, that is likely to
raise output per person. The effect of that on unit labour costs
will depend on the evolution of pay per hour. For example, if
increased hours result in more overtime working, that could
push up unit costs.

Spare capacity in the labour market is likely to restrain wage
growth and hold down the growth in companies’ costs.
Indicators suggest that there remains significant slack in the
labour market. And any future public sector job reductions are
likely to add to the degree of slack (Section3). That is likely to

Chart 4.6Private sector regular pay drift and
averagehours

3

2

1

0

1

2

3

2002

04

06

08

10

3

2

1

0

1

2

3

Average hours(b)
(left-hand scale)

Percentage change on a year earlier

Percentage points

Private sector regular pay drift(a)
(right-hand scale)

+

+

Sources: Bank of England, Incomes Data Services, Industrial Relations Services, the Labour
Research Department and ONS (including the Labour Force Survey).

(a)Calculated as the difference between AWE regular pay growth (latest three months on a year
earlier) and pay settlements (averaged over the past twelve months).
(b)Rolling three-month measure.

6

4

2

0

2

4

6

8

2000

02

04

06

08

10

Recession(a)
Employees’ compensation per head(b)

Labour productivity(d)

Unit labour costs(c)

Percentage changes on a year earlier

+

Source: ONS (including the Labour Force Survey).

(a)A recession is defined as at least two consecutive quarters of falling output (at constant
market prices) estimated using the latest data. The recession is assumed to end once output
began to rise.
(b)Employees’ compensation at current prices divided by LFS employees.
(c)Employees’ compensation at current prices divided by chained-volume measure of GDP at
market prices.
(d)Chained-volume measure of GDP at market prices divided by LFS employment.

Chart 4.5Employees’ compensation, labour productivity
and unit labour costs

Table 4.BPrivate sector earnings(a)

Percentage changes on a year earlier

Averages since

2009

2010

March 2001

H1

H2

Q1

May(b)

(1) AWE regular pay

3.5

1.9

0.4

1.2

0.7

(2) Pay settlements(c)

3.2

3.1

2.0

1.6

1.7

(1)–(2) Regular pay drift(d)

03

-1.2

-1.7

-0.4

-0.9

(3) Total AWE

3.6

-1.8

0.0

4.2

0.7

(3)–(1) Bonus contribution(d)

0.1

-3.7

-0.4

3.0

-0.1

Sources: Bank of England, Incomes Data Services, Industrial Relations Services, the Labour Research Department
and ONS.

(a)Based on quarterly data, unless otherwise stated.
(b)Data in the two months to May.
(c)Average over the past twelve months, based on monthly data.
(d)Percentage points.

34

Inflation Report August 2010

discourage employees from pushing for higher wages. Indeed,
the marked increase in unemployment during the recession
was associated with weaker pay settlements (Chart4.7).

Elevated inflation, and the associated moderate rise in survey
measures of households’ inflation expectations over the past
year (Section4.5), may put upward pressure on pay growth
and so companies’ costs over time. According to the 2009
Industrial Relations Services Pay Prospects Survey, just over
twothirds of businesses take account of a measure of inflation
during pay negotiations, although a smaller proportion
explicitly link settlements and inflation. The Bank’s Agents
have reported few signs of upward pressure on pay
settlements from this source to date.

Overall, it is likely that earnings growth will remain subdued in
the coming quarters, and that unit labour cost growth will
weaken. Prospects for pay growth are discussed further in
Section5.

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