Average earnings grew by an underlying 4.75 per cent in the year to December, according to the Department of Employment. The City had expected earnings growth to stay at November's rate of 5 per cent.
Earnings growth has more than halved since the autumn of 1990, as recession and falling inflation have seen pay settlements tumble. According to the Confederation of British Industry, pay deals are averaging about 3 per cent, with many firms agreeing freezes.
December's settlements include the 160,000 workers at Royal Mail letters who agreed a 3.5 per cent rise, following 5 per cent a year ago. Workers at British Airways settled for 3.6 per cent, down from 4.4 per cent in 1991.
Kevin Gardiner, an economist at Warburg Securities, said earnings growth was unlikely to fall below 4 per cent, but that it would 'help take the sting out of higher import costs'.
Bill Martin, at UBS Phillips & Drew, said the figures suggested that the Bank of England may have been wrong this week to suggest there was more danger of inflation overshooting its 3.5 per cent projection for the next two years than undershooting.
Earnings growth in manufacturing slowed from 5.75 per cent in the year to November to 5.5 per cent in the year to December. Excluding overtime payments, the rate of increase would have been up to half a point higher.
Service industries also saw earnings decelerate. The Employment Department revised down its estimate of earnings growth in the year to November from 5 per cent to 4.75 per cent. Earnings growth then fell to 4.5 per cent in the year to December.
Falling earnings growth has helped slow the increase in unit labour costs - the amount firms spend on wages and salaries to produce each unit of their output.
Unit labour costs in manufacturing were no higher in the three months to December than in the same period a year earlier, the first time unit labour costs have not grown over a year since 1986. Less than two years ago, unit labour costs were growing at an annual rate of nearly 11 per cent.
Unit labour cost growth is lower in Britain than in Germany or Japan, adding to the gain in international competitiveness British firms have derived from sterling's devaluation. Output per worker in manufacturing industry is now growing by about 6 per cent a year, as output remains flat and employment falls. This is the sharpest growth in productivity seen since April 1989.Reuse content