factor better explains why so many Britons want radical change, from voting for Brexit to backing Jeremy Corbyn’s far-left Labour Party. Since the financial crisis of 2008-09 Britain’s wage growth has been dreadful. Adjusting for inflation, wages fell from 2007 to 2017, a worse performance than in any othercountry except Mexico or Greece. At last, however, the tables are turning. Data released on April 16th show that nominal pay is growing at about 3.5% a year , or 1.5% a year in real terms.
The obvious cause of strengthening pay is the tight labour market. When unemployment hit its post-crisis high of 8.5% in 2011, employers knew that they could get away with offering meagre or no pay rises. Workers’ bargaining power has since grown, as joblessness has fallen. Unemployment is just 3.9%, the lowest in four decades. Britain has about three vacancies for each 100 employee jobs, the highest ratio since the data began in 2001, meaning bosses have to try harder to fill posts.
Stronger pay may also owe something to rising productivity. How much workers produce ultimately determines how much they earn. After stagnating in 2007-14, more recently output per hour has grown by about 1% a year in real terms. Silvana Tenreyro of the Bank of England has floated the idea that some of these gains might not have yet shown up in the statistics.
The question is whether wage growth will accelerate further. Workers will hope that it does: at its current rate real pay will not return to its pre-crisis peak until 2022. Yet few economists believe Britain will soon resume the healthy productivity growth of the post-war period, which was consistent with real-terms pay rises of some 3% a year. Most economic forecasts have productivity growing at an annual rate of about 1% this year and next.
Already there are signs that firms are struggling to afford the modest pay settlements that their workers are demanding. The cost of staffing per unit of output, a measure of domestically generated inflation, grew by 1.7% in 2017 but by 2.7% last year. To absorb these extra costs some firms are accepting lower profits.
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