Two independent reports by the Institute of Fiscal Studies (IFS) and Trades Union Congress (TUC) have claimed this week that wages in the United Kingdom are currently in their worst state since records began.
The reports, published on 11 and 12 June, paint a bleak picture of average wage pay in recession Britain. They purport to show that, although employment figures have not dramatically decreased since the economic downturn began in 2008, the average worker’s wages have either frozen or plummeted in that time, in some areas by as much as 11%.
The statistics are based on “real terms” figures, which take inflation into account.
IFS researchers, publishing their findings this week in the journal Fiscal Studies, have outlined five major conclusions:
Real wages have fallen by more than in any comparable five year period;
Productivity levels have dropped to an unprecedented degree;
Employment has dropped by much less than in previous recessions;
Inequality has fallen – in sharp contrast to the 1980s recession and its
aftermath;
Older workers and consumers have been much less affected than younger
generations.
The IFS claims that the new evidence of an incomparable fall in wages may account for the apparent contradiction between the UK’s fairly stable employment levels and its unprecedented decrease in economic productivity since the recession began. This paradox, known as the “productivity puzzle”, has baffled economists for some time.
The IFS report says that many companies, especially small businesses, have preferred to lower or freeze wages rather than lay off staff. Increased competition in an overcrowded job market may also be part of the problem.
“Lone parents and older workers, for example, are not withdrawing from the labour market as they have in previous recessions, which may in part be driven by changes to the welfare system,” claims the report. “This means that workers may be experiencing greater competition for jobs and hence may be more willing to accept lower wages than before.”
A decline in unionisation may also account for the fall in pay.
“Fewer workers are unionised or covered by collective wage agreements now than in the past”, the report states. “Wage growth since 2008 has tended to be lower amongst workers who were not covered by such agreements, and they were more likely to experience nominal wage freezes in 2011.”
The IFS findings follow a separate report published just one day before by the unions themselves. In an analysis of figures released by the Office for National Statistics, the TUC claims that, since 2007, total pay has shrunk across the country by an average of 7.5%.
According to the figures, on the eve of the recession UK workers were earning a total of £690 billion. Last year that figure had shrunk to £638 billion.
Worst hit have been the North West, South West, the Midlands and Scotland, where wages have been slashed by around 10-11%. London has seen the smallest cuts, at around 4%.
Frances O’Grady, the TUC General Secretary, has argued that the wage cuts reflect a failure of employers to take inflation into account, and a decrease in full-time work.
“Over the last five years, people have taken a massive hit in their pay packets, while millions more have had to reduce their hours or take lower paid work. Many people have lost their jobs altogether.”
She added that the wage cuts were not just holding back employees, but national economic recovery as a whole.
“While economic growth is the key challenge facing the UK today, the years running up to the crash taught us that growth without wage gains just creates more unsustainable debt. Employers and both local and central governments need to recognise the importance of decent wages in delivering sustainable economic growth. They can start by becoming living wage employers and being more transparent about their pay systems.”
Business chiefs, however, claim that pay cuts are necessary if lay offs are to be avoided.
“Pay restraint, though tough for many, has been crucial in protecting jobs and keeping people in work in the toughest economic climate for decades,” commented Neil Carberry of the Confederation for British Industry. “The alternative for many businesses would have been to make staff redundant, but instead we’ve seen around a million new private sector jobs created in the last three years.”
“The national minimum wage is already set at the right level,” he added.
Responding to the IFS report, the Treasury did not challenge the findings. Instead it stated that “the government understands the pressures that households face with the cost of living”.
“The government… has taken action to help,” it said, “including increasing the personal allowance, taking 2.7 million people out of income tax altogether and saving a typical taxpayer over £700, and freezing fuel duty for nearly three-and-a-half years.”
