UK workers face worst decade for pay in 70 years

Posted on November 24, 2016

Britons face more than a decade of lost wage growth and will earn no more by 2021 than they did in 2008 as the workforce endures the worst period for pay in at least 70 years, a think-tank has warned.

“One cannot stress enough how dreadful that is — more than a decade without real earnings growth,” said Paul Johnson, head of the Institute for Fiscal Studies, in his analysis of the latest official economic forecasts from the Office for Budget Responsibility.

Real wages in the UK were hit badly after the financial crisis and the OBR’s forecasts suggest the outlook has darkened again since the Brexit vote.

Average earnings fell 9 per cent between 2008 and 2013 as wages failed to keep pace with inflation. Before the Brexit vote the OBR had been expecting slow earnings growth over the next few years, with average wages finally returning to their 2008 level by 2020.

But the forecaster predicts the vote for Brexit will hurt productivity and wage growth, while the drop in sterling that followed the vote will push up inflation. As a result, it forecasts that real wage growth will stall next year and even by 2021 average earnings will be below their 2008 level.

“Half of the wage growth projected for the next five years back in March is not now projected to happen,” Mr Johnson said of the OBR forecasts.

The weaker outlook for real wages, combined with looming benefit cuts, are predicted to squeeze living standards. Separate analysis of the OBR figures by the Resolution Foundation think-tank estimated that average real incomes were forecast to grow just 0.2 per cent a year between 2015 and 2020. That is an even slower pace than the 0.5 per cent annual growth between 2010 and 2014.

The income squeeze that followed the financial crisis was fairly evenly shared across the income distribution, with poorer and richer households experiencing roughly the same rate of income growth. This was because richer households were hit by falling earnings while poorer households suffered from the impact of welfare cuts.

However, the pain in the next few years is likely to be concentrated most heavily on low and middle-income families. Although richer households are expected to experience only lacklustre pay growth, means-tested benefits are set to be cut in real terms, meaning poorer households face a much sharper drop in incomes. This is because the government is pressing ahead with welfare cuts announced by former chancellor George Osborne in an attempt to close the budget deficit as soon as possible after 2020.

The Resolution Foundation estimated that incomes of the poorest third of households would fall between 2015 and 2021, while incomes of wealthier households were expected to rise.

“Most of the initial reaction to the Autumn Statement has understandably focused on the big hit to the public finances, but just as important is the very real impact on family finances,” said Torsten Bell, director of the Resolution Foundation.

“Households risk experiencing even slower income growth in this parliament than they saw in the aftermath of the financial crisis. But unlike the last parliament, it will be low and middle-income households who feel the tightest squeeze this time round.”

Because the squeeze on incomes since 2008 has largely been driven by weak earnings growth and cuts to working age benefits, it has been felt most acutely by working age households. In contrast, the state pension has been subject to the triple lock, which ensures it rises faster than both wages and earnings over time.

Across the population as a whole, on average total net household incomes — after accounting for taxes paid and benefits received — were 2 per cent higher by 2014 than in 2007. However, the experience was different across different age groups.

The income of those aged 60 and over was 11 per cent higher in 2014 than in 2007. In contrast, the income of households aged 22-30 in 2014 was still 7 per cent below its 2007 level. The average income of households aged 31-59 was the same in 2014 as in 2007.

A similar pattern could continue over the next five years. Two of the main factors expected to squeeze household incomes over the next five years are rising prices and weak productivity growth, which will limit wage growth. As a result, Andrew Hood, a research economist at the IFS, said he “would expect working age households will feel more of the pain”.

Although average earnings are expected to remain below their 2008 levels for more than a decade, the very lowest paid workers will fare better. Since the introduction of the National Living Wage last year, the minimum hourly pay that someone over the age of 25 can receive is now about 8 per cent higher than it was in 2008. By 2021 it is forecast to rise to 20 per cent above its 2008 level.

However, the OBR’s lower wage growth forecasts have derailed the government’s plan to raise the NLW to £9 an hour by 2020.

This is because the target for the NLW is linked to wage growth: the government has promised to make sure it will be worth 60 per cent of median earnings by 2020. When the policy was first announced, this looked likely to be well over £9 an hour, but the latest forecasts predict it will be just £8.80.

New measures announced by the chancellor on Wednesday had done “not a lot” to directly boost households’ living standards, said the IFS’s Mr Johnson. The freeze to fuel duty and a small increase in the generosity of universal credit announced this week “pale into insignificance alongside the benefit and tax credit cuts announced last year, not to mention the increases in the personal allowance and the larger tax increases implemented since 2010”, he added.

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