What next for pay?

Pay rates increasing, but what is medium term outlook?

Pay in private firms is increasing at the fastest rate for years, but there is a "big question mark" over the medium term outlook for wages, according to a new report.

The Resolution Foundation said maintaining the recent pay "surge" into next year will be a challenge once inflation starts to rise.

The think tank said that average weekly earnings grew by between 3.4% and 3.6% in the three months to August, which would represent the strongest growth since 2002.

While recent wage growth has been driven by low inflation, there has also been a welcome shift in creation of higher paid jobs, said the report.

Despite the pay revival, average earnings remain several years off a return to pre-crash levels, according to the foundation.

The report also showed that under-employment – the number of extra hours wanted by those both in and out of work – has fallen over the last year, but is still around two-thirds higher than in early 2000.

Laura Gardiner, senior policy analyst at the Resolution Foundation, said: "Workers across the UK are enjoying a much-needed mini pay surge after a painful six year squeeze. While much of this growth is down to historically low inflation, there are welcome early signs of a shift towards higher paid job creation that could boost pay still further.

"But while the immediate outlook for pay is healthy, it will be far harder to maintain this catch-up growth once inflation starts to return - especially with the labour market still under-performing in many key areas.

"The relatively subdued level of moving between jobs among young people is a particular cause for concern, as it can harm career prospects and their long-term earnings potential.

"The jobs market has proved remarkably resilient over recent years. But securing a sustainable period of strong employment and pay growth will require a renewed focus on jobs quality, skills, investment and productivity."

A Treasury spokesperson said: "The report is further evidence that our economic plan is working.

"We have one of the fastest growing advanced economies, more people are in work than ever before and pay cheques are rising strongly.

"But there is more to do to deliver economic security for working people, which is why we need to keep on working through the plan, including introducing a new national living wage which the independent OBR (Office for Budget Responsibility) expect will benefit up to 2.7 million people directly, with up to six million seeing their pay rise as the knock-on effects are felt higher up the earnings scale."