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Earnings anomaly piles pressure on State Pension triple lock

  • Earnings growth (including bonuses) hit 8.8% in April to June, according to the latest Labour Market Statistics from the ONS
  • Job vacancies at record high of 953,000 in May to July, and surpassed 1 million in July
  • The unemployment rate fell to 4.7% in April to June

 

Laith Khalaf, head of investment analysis at AJ Bell, comments:

“The jobs market continued to heal as the economy emerged from lockdown, though unemployment is still significantly higher than when we entered the pandemic. The extremely large number of vacancies waiting on the shelves tells us there is an elevated level of frictional unemployment though, as the jobs market transitions back towards normality.

“Average earnings have also rocketed over the last year, and are now clocking in at 8.8%. When earnings are rising at almost 9% a year, we can safely say either the economy is overheating, or there’s a glitch in the ONS matrix. In today’s case, it’s the latter. The sheer magnitude of the spike in earnings suggests it’s a transitory statistical quirk, rather than a sustainable feature of the UK economy that will be with us for the long term.

“The main reason earnings have risen so sharply in the last year is that now millions fewer employees are on furlough, and have gone back to receiving their full wage packets rather than 80%. That’s a one off boost to earnings figures that isn’t going to repeat itself year on year. There’s also a secondary effect bumping up earnings figures stemming from the fact that many of the jobs lost in the pandemic were those of young people in lower paid roles. As we begin to see the full picture of hospitality opening up again, the return of these jobs into the calculation of average earnings should have a cooling effect.

“Statistical quirk or not, the high rate of headline earnings growth does hem the government into a tight little corner on the State Pension triple lock. The conservative manifesto commits to maintaining the triple lock, but an 8% rise in the state pension would raise questions of intergenerational fairness, as well as fiscal sustainability. That’s particularly the case given the statistical distortions caused in the headline earnings figures by the pandemic. The government normally uses the earnings growth figure published in September to determine the triple lock, and on current trends, the numbers don’t look like they’re heading in a direction that will dig them out of a hole, so some creative thinking may be required.”

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