Pay deals with an explicit link with inflation are offering the best hope of keeping up with the cost of living, according to a comprehensive pay survey by the Labour Research Department (LRD).

Such deals were largely responsible for an improvement in average union-negotiated pay rises in 2010-11, and look set to be the main bulwark against a plummeting standard of living over the next 12 months. Analysis of over 700 pay settlements published in The LRD Pay Survey found that, overall in the August 2010 to July 2011 bargaining round, the average* pay increase was 2.75 percent. This compared with two percent in 2009-19 and 2.65 percent in 2008-09. Despite the upward movement, average rises lagged a long way behind inflation over the period, with RPI inflation ranging between 4.5 percent and 5.5 percent.

The best deals were often those (predominantly in the private sector) with an inflation link that formed the latest stage of long-term agreements negotiated in the past. The average rise under these arrangements was 5.2 percent. That trend looks set to continue. Already-agreed future staged increases, nearly all of which are inflation-linked, are likely to deliver a median of between three percent and five percent if RPI is running at 2.5 percent to five percent. Such arrangements are almost exclusively in the private sector and, in 2010-11, contributed to a recovery in pay deals in the sector where the average pay rise was three percent. This was up from two percent the year before. Only 3.7 percent of bargaining groups in the sector had pay freezes, although they did cover large numbers of workers. However, there was a major disparity in fortunes between the private and public sectors, with the government’s public sector freeze policy, curbing salaries above £21,000, starting to take its toll. The average pay rise in this sector was just 1.62 percent.

For both sectors, however, a key challenge over the next year will be to close the gap between pay and price rises. Lewis Emery, LRD’s pay and conditions researcher, said: “On the basis of the evidence so far available, the squeeze on living standards in the next 12 months could be worse than in 2010-11, unless there is sharp drop in RPI inflation or a sharp increase in successful industrial disputes over pay.”

*average in this release is the un-weighted median pay increase on lowest basic rates