Why are wages going up, and what does it mean for you?

Wage growth has overtaken the rate of inflation for the first time in almost two years. But why have wages gone up, and what does it mean for your money, as well as the economy?

Average wages rose by an annual rate of 7.8% between June and September, according to figures from the Office for National Statistics (ONS).

This marks one of the most significant jumps since records began over 20 years ago. It means that wages are actually growing faster than inflation for the first time in almost two years.

Here, we explore why wages are rising, what this means for interest rates and the economy, and if they’ll keep on going up.

In this article:

Why are wages going up?

Firstly, the cost of living keeps climbing. The annual inflation rate has fallen somewhat in recent months, but it is still currently at 6.8%. This is far above the Bank of England’s 2% target.

When prices climb faster than normal, people demand pay rises in order to maintain purchasing power. This is because the value of the money in their pocket has fallen, so they need more of it to enjoy the same standard of living.

Secondly, there are also nearly 200,000 more job vacancies available now than there were between January and March of 2020, according to the ONS. This means that there is greater demand for workers. As any economist will inform you, an uptick in demand tends to push up price.

Furthermore, workers in the UK have endured somewhat sluggish wage growth over the past decade, especially compared to the cost of housing.

According to Halifax, the cost of a typical home is now 6.7 times average earnings. This figure has fallen somewhat from last summer’s peak of 7.3. Nonetheless, it’s significantly higher than a decade ago, when the typical cost of a home was around five times average earnings.

The recent narrowing of the gap between income and property prices can be attributed partly to house prices having fallen by around 5% during the last year, but also to the aforementioned increase in wages.

These recent wage hikes could therefore also be interpreted as a small market correction following years of stagnation. Workers finding it increasingly difficult to afford homes are demanding higher wages, or looking further afield for more lucrative work.

Read more: Will house prices keep falling?

What do rising wages mean for UK interest rates?

Rising wages can have several effects on the economy. The Bank of England take these factors into account when deciding on the base interest rate.

Firstly, with rising wages comes the potential for increased inflation. When people have more money to spend, demand for goods and services can rise. This can lead to higher prices if supply doesn’t keep pace.

The Bank of England has hiked the base interest rate 14 times in a row in order to tame inflation. This means that further rises are certainly not out of the question following the latest rise in wages.

“Wage growth is still significantly higher than the Bank of England might like. While high wage growth can ease the financial squeeze for households, it runs the risk of fuelling inflation if businesses pass on that cost to customers by hiking the price of their goods and services,” says Alice Haine of investment platform Bestinvest.

“This would only add further pressure to household finances at a time when energy prices are under threat from geopolitical tensions and rising demand amid the colder weather.”

If business’ costs rise too quickly, some of them may be forced cut back on hiring, or investment into the economy. While the number of job vacancies has overall risen in recent years, there was a 4.2% decrease of posts available in July to September, compared to the three months prior.

To counter this, the Bank of England could decide to keep interest rates low to encourage businesses to borrow money, so they can invest and hire, strengthening the economy.

Ultimately, setting interest rates is a balancing act. While rising wages are a crucial factor, the Bank of England will also consider other global and domestic economic indicators, and long-term projections. Over the long run, keeping interest rates at a historically high level can cause more damage to the economy than it prevents.

Read more: When will interest rates fall?

Will wages keep going up?

It’s impossible to say with certainty how wages will evolve. However, experts anticipate that the dramatic rises in income we’ve seen this year will taper out.

Inflation has been gradually falling, with the pressure on households less than it was a year ago. Energy prices are also much lower than they were this time last year, thanks to the energy price cap, which fell at the start of October.

With the burden on households easing, workers are less likely to need significant pay rises to get by.

“The Bank of England is likely to take the view that wage growth will soon slacken as economic growth remains muted and the labour market cools,” said Rob Morgan, an analyst at investment firm Charles Stanley.

My wages haven’t risen – what can I do?

Not everyone will experience the same increase in wages, even if the national average indicates growth. For instance, those employed in finance and business sectors saw their pay rise by 9.6% on average. Meanwhile, annual average wage growth for construction workers stood at just 5.7%.

If you’re not getting the increase in pay that you want – or possibly need – there are steps you can take. You could ask for a pay rise from your existing employer – see our top tips for doing so.

You could also look further afield for more lucrative work. According to analysis carried out by the Pew Research Center, half of those who switched jobs in the second year of the pandemic gained a pay rise of nearly 10%.

Finally, you could join or consult a union. This can offer you collective bargaining power, as a union can fight for a pay rise on your behalf.

Are the minimum wage and national living wage going up?

The current minimum wage workers receive depends on their age. The government decides whether the minimum wage increases in November, and this takes effect in April. The decision is made based on the advice from an independent commission. The chancellor has confirmed he will follow the commission’s recommendation, meaning the minimum wage is likely to rise.

However, the chancellor is set to increase the national living wage in April to above £11 an hour, from its current level of £10.42. Find out more about the national living wage, including how it works and who can get it.

Read more: 13 ways to boost your income