UK wages in 15-year freeze; Slowest growth decade in 210 years

We wrote in December on [Germany a beacon of stability has “never had it so good”] — and cited the stunning speech in the same month of Mark Carney, governor of the Bank of England, who spoke of Britain's first lost decade since the 1860s. On Thursday following this week's Spring Budget, economists have warned of a 15-year average real (inflation-adjusted) earnings freeze and the slowest growth since Britain was engaged with France in 1803-1815 wars, called the Napoleonic Wars.

Finfacts reported last August that in the period 2007-2015, the UK had the biggest fall in real wages (inflation-adjusted) of any other advanced country apart from Greece, since the financial crisis began in 2007. Germany had the biggest rise of the advanced countries.

The Resolution Foundation, a think-tank, says in a Budget analysis that average earnings will not return to their 2007/08 pre-crisis level until the end of 2022. It says a simple extrapolation of the average increase recorded over the final four quarters of the forecast would mean that the pre-crisis level would only be restored in the final quarter of 2022. That would constitute 15 full years of lost pay growth.

Torsten Bell, the director of the Resolution Foundation, said at a presentation Thursday: “The big picture from [Wednesday’s] budget is that the big squeezes on both the public and family finances have been prolonged well into the 2020s.

“While the Office for Budget Responsibility (OBR: the official UK economic forecaster) at least delivered some good news on borrowing, the family finances picture has actually deteriorated since the autumn statement. Britain is set for a return to falling real pay later this year, with this decade now set to be the worst for pay growth since the Napoleonic Wars."

He added that that some households are being hit more than others. “The combination of weak pay growth and over £12bn of benefit cuts means that for the poorest third of households this parliament is actually set to be worse than the years following the financial crisis.”

The think-tank says a single (no kids), full time worker earning a low wage of £13,150 and renting, will be -£380 worse off by 2020/21 while a couple (2 kids) at low/mid combined earnings of £35,890 will lose -£960. Families will typically lose the potential of £12,000 of pay growth by 2020.

Also on Thursday, Paul Johnson, director of the Institute for Fiscal Studies (IFS) said in his presentation: "On current forecasts average earnings will be no higher in 2022 than they were in 2007. Fifteen years without a pay rise. I’m rather lost for superlatives. This is completely unprecedented."

Johnson added that "employment remains, and is projected to remain, extremely strong. And among those in work earnings have been rising faster for the low paid than for the high paid. The rising National Living Wage means that will continue."

Half of the growth in employment since the recession has been in mainly one-person self employment with a rise in participation of older people.

The IFS says that overall the highest earners, the top 1%, are having a particularly bad decade. Its calculations suggest that the top 1%, having pulled away from the rest over the 2000s are being reeled back in. The ratio between earnings at the 99th percentile and those at the median hit 5 to 1 in the late 2000s. It is back at 4.6 to 1 now, about where it was in 1999. And that compression of the earnings distribution looks set to continue which will keep earnings inequality down. But it is bad news from the point of view of tax revenues. And going forward the OBR warns that: “the top end will be disproportionately hit by the UK exiting the EU (due to effects on higher paying sectors including financial services). Changes in the distribution are therefore expected to deliver a small drag on the effective tax rate over the next five years”

The Financial Times said this month:

UK employment expanded at the expense of capital stock, which contributed to low (and falling) levels of productivity. In turn, lack of investment growth hampered productivity with negative effects on wages. “Whether pay drives productivity, or productivity drives pay, they go hand in hand,” as Sarah O’Connor, our labour correspondent, puts it.

Inflation and the dynamics of the labour market are pulling real wages in opposing directions. Ultimately further progress in living standards rests on boosting productivity growth, a challenge for the coming years.

The FT adds that in 1999, only 3.4% of jobs were paid the minimum wage; by 2016 it was 7.1% and it is forecast to reach 12.1% by 2020.

The IPPR think-tank says that UK’s low-wage sectors — defined as including retail, accommodation, food and administrative services — employ a third of all workers, and produce 23% of the UK’s gross value-added. But on average they are 29% less productive than the economy as a whole.

Workers in the UK's low-wage sectors tend to be less qualified than their peers in Europe, while firms in the UK’s low-wage sectors are less likely to offer training to their staff.

The FT says supervisor jobs in sectors like retail or hospitality often only pay 30p to 50p more per hour than the minimum wage, but they usually entail more pressure and less control over hours. 

The newspaper says that when a major UK retailer hired consultants at Tooley Street Research to investigate barriers to promotion, it discovered that its workforce did not see the point. The company advertised management training and only eight of the 500 staff applied. “There’s no incentive,” one shop worker said. “I don’t think it would be worth the hassle.”