Pay growth set to fall back, says new report

Pay growth looks set to fall back next year without a significant increase in productivity, according to a new report.

The Resolution Foundation said pay growth could slump to 1% if inflation increases more quickly than predicted and productivity doesn't rise above current levels.

The think tank said issues such as availability of staff will also shape pay levels in 2016.

Laura Gardiner, senior policy analyst at the Resolution Foundation, said: "2015 marked the long-awaited return of rising real pay, following a six-year squeeze, but the recent pay rebound owed much to ultra-low inflation, which we're unlikely to see again next year.

"Pay growth in 2016 will ultimately be determined by whether the recent upturn in productivity is enough to offset rising inflation. On the upside, strong output growth and prolonged low inflation could result in the highest level of real wage growth in over a decade.

"But equally, a failure to build on the early signs of a productivity recovery, combined with a swifter-than-expected return to target inflation, could send real wage growth tumbling to less than 1%.

"Such a scenario could mean typical pay not returning to its pre-crash level until the next decade.

"There is plenty that businesses and government can do to drive productivity growth. The introduction of the new national living wage should help to focus minds on boosting output, particularly in low-paying sectors who are most affected by the new higher wage floor."

TUC general secretary Frances O'Grady said: "This is a sobering reminder of why low inflation is not a secure basis for a strong wages recovery.

"If we don't boost productivity across all sectors of the economy, future living standards will be put at risk.

"After years of falling real incomes, the last thing workers need is for recent pay growth to slow.

"A proper industrial strategy and significant investment in infrastructure must be at the top of the Government's new year's priority list to guarantee a recovery that works for all."

A Treasury spokesman said: " There are more people in work than ever before, real wages are growing at rates not seen since before the recession and vacancies reached 736,000 in the three months to October, demonstrating a strong demand for labour in our economy.

"Sustained improvements in productivity are critical to delivering both long-term economic growth and a continued increase in living standards. Recent data has shown encouraging signs but we cannot rest - that's why promoting long-term investment and encouraging innovation to create a dynamic economy are at the heart of our ambitious productivity plan to lay the foundations for a better economic future for all."