Wage Growth on a Downward Trend: Companies in the Shadow of Upcoming Tax Increases

The wage growth rate has fallen to its lowest level since the pandemic, as companies prepare for tax increases in Rachel Reeves' autumn budget. According to the Office for National Statistics (ONS), total compensation, including bonuses, rose by only 3.8 percent in the three months to August—a decrease from 4.1 percent in July. This is the slowest wage growth since November. Similarly, the annual wage increase without bonuses grew by 4.9 percent, marking the smallest increase since June 2022. An initial estimate shows that the median monthly salary fell from £2,413 in August to £2,397 in September—the first monthly decline since July 2023. A primary reason for the decline in wage growth is the decreasing demand for labor, indicating a shift in power in the UK labor market. The ONS data recorded a reduction in the number of employees by 15,000 in September, significantly above the 3,000 expected by economists. This follows a decrease of 35,000 in August, leading to quarterly employment growth falling for the first time since January 2021. Vacancies also declined—from 856,000 in August to 841,000 in the three months to September. This suggests that the times of substantial wage increases are fading as employers become more cautious about hiring. Rob Wood of Pantheon Macroeconomics notes that uncertainties surrounding the budget on October 30 have prompted companies to pause hiring. Thomas Pugh of RSM UK adds that business confidence experienced a significant decline in September. Wage growth adjusted for inflation cooled from 2.2 percent to 1.9 percent in September. Charlie McCurdy of the Resolution Foundation warns that the period of 'healthy' wage growth is ending, and future wage increases must be driven more by rising productivity rather than a hot labor market. Furthermore, the planned increase in employers' National Insurance contributions, as outlined in the budget, could further impact wage development. Keir Starmer had promised not to raise National Insurance, but the party now seems open to increasing levies on employers. Sir Nicholas Lyons of Phoenix warns of potential 'collateral damage' from such an increase. Thomas Pugh emphasizes that National Insurance effectively acts as a labor tax and could constrain the possibilities for future wage increases. In addition to the budget, measures such as Angela Rayner's labor law, which provides new rights for employees, contribute to increasing labor costs. Alexandra Hall-Chen of the Institute of Directors warns that such measures could diminish the chances of significant salary increases.