Young workers at Glasgow’s Village Hotel are celebrating a 10 per cent pay rise and an end to zero-hours contracts after staging the first UK hotel strike since the Thatcher era — in a sector where many employers are slashing staff numbers.
Their settlement encapsulates the problem with which the Bank of England is grappling: the jobs market is weakening, but pay is still rising at a pace that looks incompatible with the central bank’s 2 per cent inflation target.
The tension is clearest in hospitality, a sector heavily reliant on young, part-time, low-wage workers. Its labour costs have risen faster over the past year than in any other industry, thanks to the combination of April’s increase in national insurance contributions and the especially steep rise in the youth rates of the minimum wage.
“It’s a perfect storm,” said Bryan Simpson, an organiser at Unite the Union, which led the hotel walkout in Scotland’s biggest city. “Obviously we think the minimum wage should be higher, but businesses are shedding thousands of workers because they can’t manage.”
Village said it was pleased to reach an agreement and “proud of our highly competitive package”. But Simpson noted the group was now offering pay rates and contract terms that could soon become legal requirements, as ministers reform employment laws and seek to narrow the gap between the youth and adult minimum wage rates.
Other hotel chains are cutting staff, turning to automated check-in and easy-cleaning room designs to slim down reception and housekeeping teams. With many cafés, bars and restaurants also struggling to absorb higher costs, more than 108,000 of the 164,000 fall in payroll employment registered in the year since the election has been in hospitality.
Economists said the combined effect of policy changes had a bigger effect than initially expected on prices of consumer-facing services — which account for half the UK’s inflation basket — as well as in driving food inflation higher than elsewhere in Europe.
“For the bank, it’s part of the story of sticky services inflation,” said Michael Saunders, a former BoE rate-setter and now adviser to consultancy Oxford Economics.
April’s steep increase in the youth rates of the minimum wage — which rose much faster than the main adult rate — were also “part of the story of why it’s having such a large effect on employment”, he added.
The critical question, though, is how long workers will be able to bargain up pay despite weak hiring. With inflation at 3.8 per cent in July and set to rise further, the BoE has made clear it can keep cutting interest rates — now at 4 per cent — only if it sees enough evidence of pay pressures easing. The latest rates decision will be announced this week.
A slowdown is under way — annual growth in private sector pay, which peaked close to 8 per cent in 2023, fell below 5 per cent in the latest official data. But the BoE cannot be sure wage growth will return to the roughly 3 per cent rate it sees as consistent with its 2 per cent inflation target.
Business surveys suggest most employers expect to make pay awards of 3-4 per cent next year. Official measures usually show overall UK wage growth, including workers moving to new jobs or winning promotions, to be higher than the awards captured by these surveys.
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“Is wage growth slowing? Yes, clearly. Do we still have a problem? Yes, a bit,” Saunders said.
Business groups say employers are wary of cutting headline pay awards too far, when inflation is still high and skills shortages widespread.
Jane Gratton, deputy director of policy at the British Chambers of Commerce, said that while labour costs were a “massive concern”, many companies were freezing headcount or delaying plans to offer other benefits, such as health coverage, rather than holding down pay.
Charles Cotton, senior adviser on pay and reward at the CIPD body for HR professionals, said many companies were seeking to make benefits such as healthcare coverage less generous but felt they could not “be seen to give pay rises less than inflation in this environment”.
Before the pandemic, annual awards of about 2.5 per cent would have been typical, he added, “but inflation was lower”.
This dynamic is precisely what worries the more hawkish members of the BoE’s Monetary Policy Committee. They fear UK households have become so used to high inflation that they are now routinely holding out for bigger pay rises, while companies are finding it easier to push through price rises that would have driven customers away in the past.
If this proves to be the case, the BoE will need to keep interest rates higher than it otherwise would, with unemployment also higher, to keep inflation on target.
“The government should be worried if the equilibrium unemployment rate is higher than it used to be,” said Greg Thwaites, research director at the Resolution Foundation think-tank, noting this would worsen the existing hole in the public finances, and make it harder to pursue welfare reforms aimed at bringing inactive people back into the labour market.
The situation “might look very different in six months”, if the wage slowdown continued, he added, but in the meantime it would be risky for the government to push minimum wages higher in relation to median earnings — especially for younger workers.
Saunders also warned that further policy changes adding to labour costs could put at risk the jobs gains Britain had made in the decade before the pandemic. “We are eroding the foundations of that,” he said.
Unions, however, look back on the pre-pandemic decade as a period where employment grew, but job quality suffered and wages stagnated.
“A lot of young workers realise they are at the sharp end,” Simpson said. “We had a 17-year-old on strike who’s got a baby, and he was expected to live on £10 an hour . . . People are angry about job losses, and low pay.”