Last updated: 21.12.15

Productivity key to wage growth in 2016, say think tank

Predictions that wages in the UK will increase by an average of two to 2.5 per cent by the end of 2016 have been branded "too optimistic", after a new report has revealed that pay growth could slow to less than one per cent by December next year.

The research, conducted by the Resolution Foundation think tank, showed that pay settlements rose during 2015, but earnings growth began to level off to either at or below the pre-crisis trend.

Laura Gardiner, analyst at the Resolution Foundation, said: "A tightening labour market and ultra-low inflation were big drivers in the first year of the pay recovery, but there are signs of flattening-in measures of slack, and the expectation remains that inflation will soon start rising.

"Productivity will have to do far more of the legwork in 2016 and beyond if the pay rebound is to be maintained."

The researchers estimated that by this time next year, real-time pay is likely to be just one per cent higher due to the impact of Britain's continuing productivity problem and this year's low inflation levels that have led to an artificial impression of wage growth.

Speaking to the Institute of Directors, the Bank of England's governor Minouche Shafik hinted that the bank should consider raising the cost of borrowing next year, with inflation reaching 1.25 per cent by the end of 2017 and early 2018.

Despite the poor outlook, Adam Burden - consultant at Hay Group - remains positive. "The majority of UK employees should feel optimistic. Despite some sector variations, and the fact that we’re still catching up after several post-recession years of shrinking real wages, there will be a tangible increase in real income for many."
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