Pay rises for finance workers are deepening inequality, IFS says

While most workers face a real terms cut in earings finance professionals’ pay is outstripping inflation, the IFS found

The City of London financial district seen from St Paul’s Cathedral (REUTERS)

Pay rises for workers in the finance industry could lead to “higher inequality in household incomes”, analysis by the Institute for Fiscal Studies suggests.

Wage growth has been relatively stagnant in recent years, except for workers in fields such as banking or insurance. The pattern could signal the reversal of a pre-pandemic trend towards more equal pay across sectors, according to the study. This is because, across the economy as a whole, employees with the highest earnings have also had the strongest pay growth over the past two years.

“The reversal of pre-pandemic trends towards greater pay equality may imply higher inequality in household incomes in the years to come,” the IFS said.

As finance workers tend to be among the highest-paid employees in the UK, if their pay increases it pushes pay inequality further. The sector accounts for 29 per cent of employees with the top 1 per cent of earnings, the IFS said.

Weaker pay growth among the lowest earners, below-inflation increases to benefits and the removal of the £20 uplift to universal credit, mean the prospects for low-income households “are now much bleaker”, the IFS said.

“In contrast, strong pay growth among the very highest earners could push up the top 1 per cent share of household incomes, which has remained stable over several years,” it added.

By February 2022, average pay in finance was 31 per cent higher than it had been in December 2019, before accounting for inflation. Meanwhile, average pay across all sectors was just 14 per cent higher. This implies a real increase of 23 per cent and 7 per cent respectively according to the IFS’ analysis of payroll data.

The relatively sharp increase in pay has not come with an obvious shortage of finance workers – relative to the rest of the labour market. There has also been no sudden increase in productivity, according to the IFS.

The surge in pay in the financial sector also does not seem to be the product of bonuses in the sector, which can distort pay data, the analysis found.

This is because “the gap between finance and other sectors started opening up in autumn 2021 – before bonus season – and the recent surge in pay far exceeds any seasonal trends that can be seen in previous years”, the IFS said.

The findings come after the prime minister was forced to admit that existing measures announced in the Spring Statement are not enough “to cover everybody”.

Boris Johnson made the admission in reference to measures including a council tax rebate to help ease the pressure of a 50 per cent increase in energy bills.

“I accept that those contributions from the taxpayer – because that’s what it is, taxpayers’ money – isn’t going to be enough immediately to help cover everybody,” the PM said on ITV’s Good Morning Britain.

He added: “We’re doing everything we can to help with the pressure on family budgets and I totally understand and get what people are going through.”