UK pay growth sinks to five-year low as younger workers hit by hiring slowdown | Economics
Wage growth slowed sharply in the three months to January, according to the Office for National Statistics’ latest snapshot of the labor market.
Average earnings fell from 4.2% to 3.8% in the three months to January; This was a larger decline than City economists had predicted. This was the slowest rate of wage growth in more than five years.
The unemployment rate remained unchanged at 5.2 percent.
The ONS said job vacancy rates remained stable and the number of people entering the labor market increased, albeit modestly.
Martin Beck, chief economist at consultancy WPI Strategy, said young workers were doing worse in the labor market than other groups.
“The divide between younger and older workers remains stark. Since on-payroll employment peaked in mid-2024, the number of workers 34 and under has fallen by almost 220,000, while employment for those 35 and older has increased by 110,000. This marks the sharpest cutbacks employers are seeing in entry-level hiring,” he said.
The figures also showed that a decline in public sector pay rises was one of the biggest factors affecting the overall decline in average earnings growth, excluding bonuses, which financial markets expected to fall to just 4% in January.
Public sector pay adjustments were often delayed by several years and bonuses were included to offset an earlier rise in inflation. The ONS said these were starting to fall outside the annual figures and the overall average was falling.
The average annual regular earnings increase was 5.9% in the public sector and 3.3% in the private sector.
The slowdown in wage growth is unlikely to affect Bank of England policymakers, who meet later today and are expected to keep interest rates steady at 3.75% amid conflict in the Middle East and a sharp rise in oil prices.
Before the war against Iran, central bank policymakers were expected to lower interest rates to prevent the economy from falling into recession, but concerns about rising inflation resulting from high oil prices were expected to remain.
Peter Dixon, senior economist at the National Institute of Economic and Social Research, said the slowdown in wage growth presented policymakers with a dilemma, as the war in the Middle East was driving up prices while pushing down inflation.
“Continued weakness in the labor market will add to the headaches the Bank of England is facing ahead of today’s interest rate decision,” he said.
He added that he would be concerned that the central bank would increase workers’ wages in the coming months in response to rising oil prices and a rise in inflation.
“While there are upside risks, we view them as limited due to the fragility of overall activity and the potential for AI-related labor market changes that will further dent wages,” he said.
Jake Finney, senior economist at PwC UK, said weakness in the labor market makes it less likely that higher energy prices will impact wider inflation and “makes it harder to justify further rate hikes”. “However, a rate cut seems unlikely until geopolitical tensions ease.”
The Federal Reserve on Wednesday kept interest rates in a range of 3.5% to 3.75%, resisting pressure from Donald Trump to lower them.
