“Our labour market works pretty well,” Mr Dicks from the Office of Budget Responsibility told MPs on the Treasury Select Committee yesterday. “As evidence for that I would cite the freezes and cuts in private sector pay as people price themselves into work or accept lower pay so they are not priced out of work in a recession.
“We think the labour market will continue to do that. We’ve got falling real wages for the next three years, earnings rising less than CPI (the Consumer Price Index which does not include mortgages) and rather less, I think, than RPI for the next four years.”
Workers have already taken a real-terms pay cut in 2009, when average earnings rose 1pc against CPI inflation of 2.1pc.
Mr Dicks’ warning came as the Office for National Statistics released official inflation figures for June. CPI fell from 3.4pc to 3.2pc over the month due to falling petrol prices, but remains far above the Bank of England’s 2pc target. RPI is higher still, at 5pc after a 0.1 percentage point fall over the month.
Both measures of inflation exceed the most recent statistics on pay rises. According to Incomes Data Services, wages rose at an annual average rate of 2pc in the three months to the end of May, as one in ten private sector pay settlements resulted in a freeze in the past three months and two in five in the public sector.
Workers have been kept in jobs as many companies managed through the recession by cutting and freezing wages, or moving staff to shorter hours. With a lot of slack still to be taken up Companies will ask these workers to return to full hours, work harder to reduce unit labour costs before they turn to recruitment. Demand will be dampened by the lower standard of living the majority will enjoy as a result of inflation outstripping wage increases as Britain prices itself back into national and international competitiveness.
It’s a tough road ahead as Britain takes its medicine but at least the Organisation for Economic Cooperation and Development yesterday applauded the Government for its “courageous and appropriate” Budget.
Author: Chris Slay
