Pay growth could slow to just 1% in 2016 unless there is a significant pick-up in productivity, according to the Resolution Foundation’s latest quarterly earnings outlook.
The Foundation’s analysis shows that the central Office for Budget Responsibility projection for productivity growth of 1.7 per cent by the end of 2016 and inflation of 1.4 per cent would mean typical wages increasing at around 2.1 per cent – less than the current rate of 2.5 per cent.
However, if productivity grows faster than expected and edges up to 2 per cent and inflation stays low the Foundation says typical wages could rise by around 3 per cent next year – the fastest growth in over a decade.
On the other hand, if productivity growth fails to progress beyond its current rate of 1.3 per cent, the pace of real wage growth could fall to 1.5 per cent) or to less than 1 per cent if inflation also grows more quickly than forecast, says the Foundation.
It adds that other factors, such as un- or under-employment, will also help to determine what happens to pay next year, although it predicts they are unlikely to play as large a role as this year.
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 per cent. 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.”