How strong is pay growth?

The purpose of Bank Overground is to share our internal analysis. Each bite-sized post summarises a piece of analysis that supported a policy or operational decision.
Published on 31 August 2021
Pay growth has been artificially boosted by Covid-related factors in the labour market. We estimate that underlying annual wage growth is lower than the headline data suggest, but will strengthen as the economy recovers from the pandemic.

Average pay growth has been very strong in recent months, partly reflecting temporary Covid-related distortions in the labour market.

Part of the recent strength in pay growth can be explained by base effects. Annual growth rates compare wages to their levels one year ago. So current growth rates are based on a comparison with the early stages of the pandemic, when the level of wages had fallen substantially. Measuring growth against this low base leads to a higher annual growth rate.

Meanwhile, the furlough scheme has helped workers stay attached to their jobs but generally at lower pay than usual, which has dragged on average wages. But changes in the composition of the labour market have pushed up average wages, as job losses have been skewed towards lower-paid roles. These changes in composition have offset the impact of the furlough scheme on pay growth.

Due to the impact of base effects, the furlough scheme and the changing composition of the labour market, we estimate that underlying annual pay growth is likely to be considerably lower than suggested by the headline data. We estimate that underlying annual pay growth has averaged around 2¾% during the pandemic, and was above 3% in the three months to May – much lower than the figure of around 7% recorded in the official data at the time (Chart A).

We expect underlying annual wage growth will strengthen over the course of 2021, supported by the recovery in the labour market.

Chart A: Estimated underlying pay growth is around pre-Covid rates

Annual growth in private sector regular pay and estimated impact of furlough and compositional effects (a)

Three lines showing various pay growth measures from 2019 to 2021.


  • Sources: HMRC, ONS and Bank calculations.
  • (a) Growth in three-month average pay relative to the same period a year earlier. Furlough and compositional effects are Bank staff estimates. Data to end-May.

This post was prepared with the help of Harvey Daniell and Catherine Shaw.

This analysis was presented to the Monetary Policy Committee in August 2021.

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