U.K. Workers Get Real Pay Increase as Labor Market Tightens

(Bloomberg) -- Britons got their first real pay increase in more than a year in the first quarter as wage growth overtook the rate of inflation.

Average earnings excluding bonuses rose 2.9 percent from a year earlier, the fastest pace since August 2015, the Office for National Statistics said Tuesday. Consumer-price inflation averaged 2.7 percent in the same period and the rate is expected to slow further as the effect of the pound’s 2016 losses fade.

U.K. Workers Get Real Pay Increase as Labor Market Tightens

The return of real purchasing power is good news for consumers after a year of falling living standards but it may suggest that home-grown price pressures are starting to build, with the Bank of England assessing the economy now has little slack left.

Officials, who opted to hold interest rates last week after a weather-blighted first quarter and a bigger-than-expected fall in inflation, could move in August if growth bounces back as expected, according to Bloomberg economist Dan Hanson. The pound pared earlier losses following the figures and was at $1.3535 as of 10 a.m. London time, down 0.1 percent on the day.

Skill shortages mean firms are having to boost wages to fill jobs, and the latest figures underscored the buoyancy of the labor market. The employment rate reached a record-high 75.6 percent after the economy added a larger-than-forecast 197,000 jobs between January and March. Unemployment held at a 43-year low of 4.2 percent and inactivity fell to the lowest rate on record.

Productivity Decline

Total earnings growth slowed to 2.6 percent after a big increase in bonus payments in December fell out of the calculation. Excluding bonuses, private-sector pay growth accelerated to 3 percent, with the figure for March alone reaching 3.1 percent.

There was less positive news on productivity, as output per hour declined 0.5 percent following gains averaging 0.9 percent over the previous two quarters.

While the decline was the result of a possibly temporary slowdown in growth combined with a 0.6 percent increase in hours worked, the figures may revive concerns about the weakness of productivity over the past decade. Poor productivity -- output per hour was up just 1 percent on the year -- means any pickup in wages risks pushing up inflation as firms try to protect their margins.

A 400,000-person surge in employment over the past year was driven by U.K. nationals, possibly reflecting the sharp decline in net migration since the vote to leave the European Union.

Employment among EU nationals fell 1.2 percent, the first annual decline since 2010. There was a record 91,000 drop in employment among citizens of the eight EU countries that joined the EU in 2004.

There were signs that heavy snowfall in March acted as a modest drag on the labor market. Figures based on a limited sample size showed employment fell 170,000 on the month and unemployment rose for the first time this year. There was also a small decline in the number vacancies in the three months through April.

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