Q&A: why are wages rising slowly?

Strong economic growth and falling unemployment might be expected to be reflected in higher wages - but instead they have fallen for the first time since the height of the financial crisis five years ago.

The Bank of England has also halved its forecast for pay growth this year from 2.5% to 1.25% - below the rate of inflation and therefore a fall in real terms.

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Why is pay growth stubbornly weak?

The Bank gives a range of possible reasons including that the long-term unemployed returning to work may be willing to work for lower wages.

This effect may have been intensified by less generous benefits for the jobless, and recent jobs employment growth being skewed towards lower skilled occupations.

The Bank also points to the likelihood that nearly half of workers are not likely to have had a pay award since unemployment started falling sharply late last year.

It adds that as people feel increasingly confident about leaving - or threatening to leave - their jobs, wage rises could feed through.

Does the fact that we are working longer have any effect?

It may do, because this partially explains growing "labour force participation", which is at its highest level since 1991, reflecting a growing supply of workers for employers, consistent with less upward pressure on pay.

The Bank's inflation report suggests that changes to the women's state pension age, the abolition of the default retirement age, and concerns about the adequacy of pension and saving income may also have had an effect.

On the other hand, an increase in the share of younger employees would also tend to reduce average wages as they are typically lower paid.

Is everyone suffering poor pay growth?

No. The report suggests that more jobs in sectors that have lower average wage rates are masking higher pay within other sectors.

But changes in the balance of mix of jobs such as between skilled and lower skilled occupations are reducing annual wage growth by around 0.5%, it adds.

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Is pay suffering because workers are less productive?

The Bank says poor productivity - which includes measures such as output per hour or output per worker - may offer a partial explanation.

The fall in productivity during the recession was larger, and the recovery more protracted, than in any other post-war downturn.

In the UK, it has lagged behind that of rival economies such as the US and France and is 17% below where it would have been if pre-crisis trends had continued.

The weakness is a puzzle for policy makers and Bank officials have been at a loss to explain the scale of the shortfall - though it has partly been put down to firms holding on to workers during the downturn despite being less busy, and lower investment.

Will wages keep falling?

The Bank's forecast suggests that in real terms they will for now. That is because the expected rise this year lags behind inflation forecast at just under 2%. However, it is pencilling in 3.25% pay growth for 2015 and 4% for 2015.

However the actual drop in wages as shown by the latest figures looks likely to be an anomaly because the headline number is a three-month average from April to June.

This was skewed by a 1.5% monthly fall in April compared to the same month in 2013, which saw high bonus payouts because of tax changes at the time.

The next headline figure will show a May-July average, which will include small pay rises in May and June, but will not be skewed by April's sharp drop.

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How does this affect interest rates?

Weak wage growth has become an increasing matter of concern for the Bank of England's rate-setters.

Policy makers do not want to risk the recovery by lifting rates and driving up borrowing costs for households if they will struggle to afford the higher costs.

The Bank's preferred measure of "slack" in the economy is uncertain, because while job numbers are growing strongly, pay remains weak.

Evidence such as the supermarket price war prompted by the success of discount grocers Aldi and Lidl also points to household budgets still being tight.

Some analysts had been expecting a rate rise as soon as this year but the latest pay figures coupled with the Bank's shift in tone suggest this will have to wait until 2015.

What are the political implicationsjQuery191041935484879754537_1408008899511

Poor wage growth figures add fuel to Labour's claim of a "cost-of-living crisis" in which the benefits of better economic growth are not filtering through to ordinary households.

Earnings have not consistently been improving at a higher rate than inflation since 2008 and hopes they would catch up this year have been thwarted.

Meanwhile a coming interest rate rise is likely to see some squeezed households face higher mortgage payments this side of a general election.

Read more about UK wage growth:
Why we're all getting poorer
More staff need a living wage
Real wages 'still falling'