UK Wage Growth Surges, Jobs Market Remains Resilient Despite Tax Increase

In the final quarter of 2024, UK wage growth excluding bonuses accelerated to a significant 5.9% year-over-year, according to the Office for National Statistics (ONS). This represents a sharp increase from the previous 5.6% rise and aligns with economists' forecasts. Private sector pay growth also picked up to 6.2%.

Employment Holds Steady

Despite concerns about a potential slowdown in the labor market following the Labour government's £26 billion increase in payroll taxes, the number of payrolled employees rose by 21,000 in January. This brings the overall decline in employment to just under 20,000 since Chancellor of the Exchequer Rachel Reeves implemented the tax increase on October 30th.

Economists had predicted a 30,000 drop in payroll numbers for January. Additionally, December's figures were revised downwards, showing a decline of 14,000 instead of the initially reported 47,000.

Impact on Monetary Policy

The strong wage growth and resilient jobs market pose potential challenges for the Bank of England (BOE). Although policymakers recently cut interest rates to support the economy, they cautioned against a rapid easing approach due to persistent inflationary pressures.

Business surveys had indicated job cuts on a scale akin to the financial crisis in the aftermath of the budget. However, official data has yet to reflect a significant deterioration in the labor market.

Real Wage Growth Boosts Household Finances

Wage growth outpaced inflation in the fourth quarter, leading to a 3.4% increase in real pay. This represents the fastest pace since the summer of 2021 and provides a boost to household finances.

Business Response to Increased Employment Costs

The BOE is closely monitoring businesses' response to the increased employment costs. Firms may either pass on these costs to consumers, exacerbating inflationary pressures, or reduce wage growth and implement job cuts. The central bank expects businesses to spread the impact through various channels, but it now anticipates a slightly larger influence on prices in the near term.

Outlook

Business surveys suggest that wage growth may moderate slightly in 2025, reaching around 4%. However, policymakers remain concerned about the accuracy of official employment estimates and are working to develop new surveys to better gauge the labor market's tightness.