Loading...
Click here for full report and disclosures
â A self-administered supply shock: The recent combination of strong pay gains, no GDP growth, and falling employment in the UK is consistent with a labour supply shock. Our chart strongly suggests that recent and forthcoming increases in the minimum wage are causing a much larger rise in pay than is justified by labour demand. The resulting upward pressure on labour costs will be compounded by the increase in tax on employers from April. As a result, we downgrade our 2025 GDP growth forecast from 1.3% to 1.1% and raise our CPI inflation forecast from 2.8% to 3.0%.
â A triumph of hope over reason: UK policymakers were quick to change tack when their favourite measure of pay growth told them something they did not like. Following the acceleration in private sector regular earnings growth in October, the Monetary Policy Committee (MPC) branded the measure âvolatileâ. Instead, policymakers leant heavily on surveys that show salaries for new hires easing and that firms only plan to raise wages for existing staff by 3-4% in 2025.
â Strong pay growth will not be a one-off: It is true that the labour market is cooling, illustrated by declining job vacancies. But the hard data show strong growth in pay regardless. Moreover, these data do not suffer from the sampling issues that have made the UK employment and unemployment rate data unreliable. Annual growth in average weekly earnings  based on a sample of 12.8 million employees  is running at over 5%. Even more reliable is the new payrolls data, covering all 30 million employees in the UK. The three-month average of median pay in this immense dataset stepped up to 6.7% yoy in November. This measure telegraphed the jump in average weekly earnings in October ahead of time. It almost guarantees that the MPC will continue to be surprised to the upside by pay growth.
â The minimum wage policy mistake: Due to its complete coverage, the payrolls dataset is extremely rich. This has enabled us to identify the minimum wage as the root cause of large increases in pay. Plotting pay growth across the wage distribution shows that it has eased off in the top half of the distribution, as we would expect, given the cooling of the labour market. However, at the 25th percentile of the distribution it increased by 9.2% yoy in the three months to October â see Chart. For context, a worker at the 25th percentile earns £17,350 pa, equivalent to a full-time minimum wage job.
â Wage compression: Past rises in the minimum wage have compressed the bottom half of the pay distribution, causing increases in the mandated minimum to cascade up the pay scale as firms try to maintain the monetary incentive for employees to progress. Therefore, firms most exposed to increases in the minimum wage and the hike in employer social security contributions in April will not be able to offset the cost by freezing wages. Instead, they will have to absorb the cost increase or pass it on to prices. Even worse, they will likely scale back output and employment as well.
â Policy implications: Monetary policy is ill-equipped to counter such a policy-driven increase in labour costs. Offsetting cost-push inflation by depressing demand using interest rates would require an undesirable fall in output and a rise in unemployment. A much more effective and less painful policy would be cancelling the next minimum wage increase scheduled for April 2025. That currently seems unlikely. This suggests that the MPC will instead not be able to reduce interest rates by much next year (only twice, in our view), and have to accept above-target inflation.
Chief Economist
+44 20 3207 7889
holger.schmieding@berenberg.com
Felix Schmidt
Senior Economist
+49 69 91 30 90 1167
Economist
+44 20 3753 3067
Andrew Wishart
Senior UK Economist
+44 20 3753 3017
Atakan Bakiskan
US Economist
+44 203 207 7873
This material is intended as commentary on political, economic or market conditions for institutional investors or market professionals only and does not constitute a financial analysis or a research report as defined by applicable regulation. See the "Disclaimers" section of this report.
The commentary included herein was produced by Joh. Berenberg, Gossler & Co. KG (Berenberg). For sales inquiries, please contact:
Phone: +44 (0)20 3207 7800
Email: berenberg.economics@berenberg.com
BERENBERG
Joh. Berenberg, Gossler & Co. KG
Neuer Jungfernstieg 20
20354 Hamburg
Germany
Registered Office: Hamburg, Germany
Local Court Hamburg HRA 42659
For Berenberg the protection of your data has always been a top priority. Please find information on the processing of personal data here.
Any e-mail message (including any attachment) sent by Berenberg, any of its subsidiaries or any of their employees is strictly confidential and may contain information that is privileged or exempt from disclosure under applicable law. If you have received such message(s) by mistake please notify the sender by return e-mail. We ask you to delete that message (including any attachments) thereafter from your system. Any unauthorised use or dissemination of that message in whole or in part (including any attachment) is strictly prohibited. Please also note that any legally binding representation needs to be signed by two authorised signatories. Therefore we do not send legally binding representations via e-mail. Furthermore we do not accept any legally binding representation and/or instruction(s) via e-mail. In the event of any technical difficulty with any e-mails received from us, please contact the sender or info@berenberg.com. Deutscher disclaimer.
Click here to unsubscribe from these emails.
Loading...
Loading...
