Deciphering the pay puzzle

Last week’s Inflation Report saw the MPC place more emphasis on earnings at a time whenindicators are giving radically different signals regarding its current – let alone likely future –strength. Indeed, while annual growth in the official measure of average weekly earnings weakenedto a record low recently, many surveys suggest that pay growth is picking up.

While the official figures are not perfect, we think that they are the best gauge of what’s reallyhappening in the job market. The low rate of job-to-job moves and the rise in the amount of labourthe population is willing to supply help to explain why pay growth has been so weak. And whilerising consumer confidence should soon make workers more willing to move jobs, we think thatfurther strong growth in the workforce will mean that pay growth strengthens only gradually ahead.