UK’s Return to Real Pay Raises

A super-tight labor market has convinced UK firms to raise wages, particularly for the lowest-paid workers.

British leaders may be divided over Brexit and which team to root for in the all-English Champions League Final, but they do seem to agree on one issue: employers should pay their workers more.

In the first quarter of the year, wages in the United Kingdom rose 3.5% versus the same period a year ago, according to data from the UK’s Office of National Statistics. It’s the best increase Britain’s workers have had since the financial crisis more than a decade ago and helps reverse a period when the real, or inflation-adjusted, rates of pay declined.

The UK’s recent pay bump echoes a similar rise in wages in the United States. (American wages are up 3.2% over the past year.) And, as with the US, several simultaneous factors are driving this. Britain’s labor market is as tight as it has been in decades; its unemployment rate is 3.9%, the lowest level since the mid-1970s. That’s at least partly due to Brexit fears convincing foreign workers to either stay away or, if they were already in the UK, leave.

“It’s particularly true in healthcare and nursing,” says Ben Frost, Korn Ferry’s global general manager for pay. Britain’s state-run National Health Service relies heavily on non-native employees. The uncertainty around work status for foreign workers is having a far bigger impact on tightening the labor market than Brexit’s economic dampening effect, says Frost.

In some ways, this year’s raises are also a form of a catchup for the years when inflation withered the purchasing power of stagnant pay packets. Following the 2016 Brexit vote to leave the European Union, the value of Britain’s currency plunged, and then, a year later, inflation jumped. As a result, in 2018 workers got a raise that didn’t keep up with the rising cost of living. Inflation was close to 3% in 2018, while pay increases averaged 2%.

“People got worse off in real terms,” Frost says. Now, with the tighter labor market in Britain and many more employment opportunities, workers have demanded higher pay—and their employers have in general paid up.

And yet there is a further wrinkle in the UK statistics: changing regulations. The UK has ratcheted up its legal minimum wage five times since 2016, including a nearly 5% increase that went into effect last month. Because more than 2 million workers are paid at or near the minimum, the effect of mandated increases on the overall figures has been considerable, says Mark Thompson, Korn Ferry’s senior client partner for reward and benefits in the UK.