Inequality in Britain risks being deepened by City’s biggest bonus and wage boom since the 2008 financial crisis, the country’s leading economic think tank has warned.
The Institute for Fiscal Studies (IFS) said the return of windfall payments from the financial industry meant the top 1% of workers were starting to drift further away from the rest of the UK workforce despite the cost-of-living crisis affecting the country as a whole.
Suggesting that the city’s bankers would be better protected than most from the soaring cost of living, the think tank said pay and bonus offers in the Square Mile had skyrocketed in recent months and increased about twice as much as other sectors over the past two years. .
According to the report, the average monthly salary in the finance sector in February was 31% higher than in December 2019 in terms of cash, compared to 14% across all sectors. Wage growth was driven by high earners, reflected in the higher average figure. However, the median salary in the financial sector was also significantly higher than for the economy as a whole.
The IFS said bankers, fund managers and other finance workers in the city made up almost a third of all employees in the top 1% income bracket, meaning that a period exceptional for this group would put them further than everyone else.
The IFS said this contrasted with the trend from 2016 to 2020, when low earners saw the strongest wage growth.
Average annual wage growth, including bonuses, has increased in recent months as unemployment falls despite the furlough ending, hitting 5.4% in February. However, wage growth has not kept pace with soaring inflation driven by rising fuel costs and soaring energy bills, exacerbated by Russia’s war in Ukraine. Inflation hit 7% in March and is expected to peak at close to 10% later this year.
However, the average figures mask a growing divide between different sectors of the workforce, underscoring how the urgent cost of living is likely to hit some people harder than others. Private sector personnel have seen the strongest annual wage growth, and public sector wages have fallen the most relative to inflation.
Xiaowei Xu, senior research economist at IFS, said: “Income inequality had been declining for a few years before the pandemic hit, with low-wage workers experiencing the strongest wage growth. The recent increase in salaries for employees in the financial sector – particularly among the sector’s high earners – has led to a reversal of this trend.
“This appears to be the first time since the financial crisis that earnings in the financial sector have taken off like this and it remains to be seen whether this is a one-time spike or a new trend.”
A spokesperson for UK Finance, the trade group for the financial services sector, said: “The banking and finance sector is a major source of jobs across the country. It provides a range of highly skilled jobs and is one of the most important sources of tax revenue for the government.