The Government's socalled "open door" policy to Polish and other migrants from eastern Europe is keeping a lid on wage inflation and indirectly preventing the Bank of England lifting interest rates further, analysts said after another subdued labour market report.
Though official figures showed average earnings pushing higher in the three months to June, analysts said the rise in the labour force had limited the spike and reduced the need for tighter monetary policy.
The increase in the labour force was evident in the latest employment figures, with the office for National Statistics reporting the number of economically active was up 133,000 in the second quarter from the first and 482,000 higher, or 1.6 per cent, year-on-year. One consequence has been to increase the number unemployed, indirectly helping hold down inflation, analysts said.
"Not surprisingly, this huge growth in the labour force, of which 223,000 is from increased numbers of economically active people over the age of 50 and much of the rest from migration, especially from Poland, has held down wage inflation," said Douglas McWilliams, chief executive at the Centre for Economic and Business Research.
The statistics office said average earnings, including bonuses, rose by 4.3 per cent in the three months to June last year, higher than expectations for a second consecutive 4.1 per cent. But in its Inflation Report last week, the Bank of England indicated there were few signs past increases in energy prices had fuelled pay pressures.
Governor, Mervyn King, has often stated the inflow from eastern Europe since 2004 has helped keep a lid on wage growth even though energy costs have surged. However rate-setters get concerned if average earnings rise by 4.5 per cent or above.
The UK Independence Party, which seeks to get out of the EU and came second in the last European elections, yesterday lambasted the Government for its stance to migration, with Romania and Bulgaria poised to join the EU next year.
UKIP MEP Nigel Farage said an additional 300,000 Romanians and Bulgarians could come to the UK and strain public services.
In the Government, there are growing calls for a new formula.
This week, ex-minister John Denham called for a delay in allowing people from Romania and Bulgaria to work in the UK.
Mr Denham, who chairs the influential Home Affairs Committee, said he thought a "breathing space" was needed "to absorb" recent immigrants.
The UK was one of only three EU countries in 2004 to give all the new EU citizens work rights, but seriously under-estimated the response. Instead of the expected 13,000 arrivals, around 600,000 came.
"I think it would be sensible to delay the step of allowing people to come here to work until we have had more time to absorb the much bigger inflow from Poland and other eastern European states that's taken place," Mr Denham said.
Even if the Government does impose limits on Romanian and Bulgarian migration, analysts reckon there will be sizeable inflows from existing EU accession countries.
"It is unlikely the inflow of migrant labour will slow significantly anytime soon," said Michael Saunders, economist at Citi-group. "UK pay levels remain several times higher than in Eastern Europe, low-cost flights are available, a growing number of specialist agencies facilitate employment of eastern Europeans, and there is no limit, quota or restriction on their employment."
He said this implied UK potential growth would stay high.
"Hence even GDP growth of 2.75 per cent this year and in 2007 probably will not be enough to stop unemployment rising further - thereby keeping a lid on pay deals," he added.