Productivity ‘is key to higher wages’

December 15, 2015 12:15 am Published by

Productivity ‘is key to higher wages’, report says

  • 15 December 2015
  • From the section Business

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Wages are unlikely to rise significantly next year unless productivity jumps, a new report finds.

Pay growth could be just 1% if inflation rises faster than expected and productivity remains steady, the Resolution Foundation said.

Issues such as the availability of staff would also affect pay growth in 2016, the think tank said.

Real pay increased this year after six years of stagnation, but only because inflation remained low.

Laura Gardiner, senior policy analyst at Resolution Foundation, said that pay growth next year would depend on whether the recent rise in productivity could offset rising inflation.

“Strong output growth and prolonged low inflation could result in the highest level of real wage growth in over a decade,” she said.

“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 average pay levels do not return to its pre-financial crash levels until the next decade.

Both businesses and government could help increase productivity, Ms Gardiner said.

‘Proceed with caution’

“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.”

Meanwhile, a member of the Bank of England’s Monetary Policy Committee said she would “proceed with caution” and wait for wages to rise before voting for an interest rate rise in the UK.

Dame Nemat (Minouche) Shafik, deputy governor for markets and banking, said: “I will wait until I am convinced that wage growth will be sustained at a level consistent with inflation returning to target before voting for an increase in Bank Rate.”

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Bank of England deputy governor Dame Nemat Shafik will “proceed with caution” on interest rates

In a speech at the Institute of Directors, in London, the former World Bank vice-president said that excluding further shocks, interest rates could rise faster than the path implied in the Bank of England’s most recent Inflation Report.

To underline the fact that the recovery was not yet complete, Dame Nemat highlighted data which showed vehicle owners were not replacing their tyres at the same pace as before the financial crisis.

She also said that the current rate of 0.5% was not the absolute lower limit , adding “it could go lower if we have to”.

The US Federal Reserve is widely expected to increase interest rates for the first time in a decade on Wednesday.

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