TalkingEconomics: The UK wage puzzle continues

While employment is at a record high, wage growth remains anaemic. We forecast the Bank of England to keep interest rates on hold.



Azad Zangana
Senior European Economist and Strategist

Strong employment has been the bedrock of the UK recovery since the global financial crisis but despite a record employment rate, wage growth has been anaemic.

Low productivity is one reason for the weakness; the rise of the “gig” economy and zero-hours contracts could be another according to the Bank of England's (BoE) Chief Economist, Andy Haldane.

The changing composition of the marginal worker

The gig economy is best described as payments on the basis of tasks carried out rather than hours worked.

Meanwhile, zero-hour contracts are agreements where hours of employment are not guaranteed from period to period.

There is no data on pay distributions of zero-hours contract workers, but it is fair to say that given their composition of mostly young workers in education, working part-time, puts them in lower paid categories.

Improving dynamism should boost wage growth

Another factor which can affect pay growth is the dynamism, or velocity of flow, within the labour market. Encouragingly, the rate of job losses is falling (which should make workers feel more confident about job security and encourage asking for more pay) as is the quit rate (the rate at which those that have been in continuous employment move to a new job). Research has shown that moving jobs usually boosts a wage.

Taken together, these two factors mean we should be seeing an improvement in wage growth in the near future all else being equal. However, while dynamism has improved, the labour market lags activity. Therefore, there is no guarantee the recent improvement will continue.

Furthermore, our forecast shows sub-trend GDP growth for at least the next year. This means lower employment growth, and potentially a rise in the unemployment rate, both of which are detrimental for pay growth.

Can the BoE really raise rates in August?

While inflation has been a little higher than the BoE had forecast, GDP has been significantly weaker than expected. Similarly, while unemployment is very low at present, wage pressure is absent. Moreover, it looks like unemployment may be on the verge of rising.

Overall, when considering the fragile state of the household sector and concerns over Brexit negotiations, we don’t think the BoE can really justify raising interest rates now.

We continue to forecast no change in monetary policy until well into 2019. The Bank missed its chance to raise interest rates between 2015 and 2016, but should recognise that the economy is now too fragile for another headwind.


Azad Zangana
Senior European Economist and Strategist


Follow us

Schroder International Selection Fund is referred to as Schroder ISF throughout this website.

For illustrative purposes only and does not constitute a recommendation to invest in the above-mentioned security / sector / country.

© Copyright 2020 Schroder Investment Management (Europe) S.A., German Branch is subject to the Luxembourg law dated 17 December 2010.