Wages doubled in value, on average, every 29 years prior to the financial crash. Now, a new report published by the Resolution Foundation, and funded by the Nuffield Foundation, says this has now risen to 81 years.
Wages growth averaged 2.2%, down from a pre-crisis average of 4%.
This year, according to the Office of National Statistics, wages did grow faster than at any time in the last decade. Low unemployment has historically always seen wages rise as employers compete to attract a smaller pool of available workers. However, nominal pay growth has averaged just 2.2% since 2014. Down from a pre-crisis average of 4% and is only just above the Bank of England’s 2% inflation target.
Economists say that wage rises have failed to respond to the low unemployment figures in the same way they have done in the past.
The think tank said that underemployment and insecure work rates must also be included “alongside unemployment when measuring labour market slack. To recognise that many workers want to take on more hours or find more secure work”.
Labour market slack is the shortfall between the volume of work desired by workers and the actual volume of work available.
Many workers are looking for longer hours and more secure work.
The report found that 700,000 employed people want to work more hours than they do. [And] are actively searching for work. This is up 200,000 from before the financial crisis.
This undermines the improvement observed in unemployment rates. Few people being out of work typically improve employees’ negotiating position. With employers forced to raise wages to attract the few available workers.
However, the high number of people looking for additional hours on top of what they have already secured has removed such a pressure off employers, contributing to wage stagnation.
By including these people, the report shows that the relationship between a tighter labour market and stronger pay growth is alive and well.
The report blames poor productivity growth.
Resolution Foundation senior economic analyst Stephen Clarke said: –
“Britain is living through a painful pay puzzle, where earnings growth remains rooted below 3%. Understanding the real reasons why pay is performing so badly is one of the biggest challenges we face.”
The report blamed poor productivity growth, along with precarious work, such as zero hours contracts for the slow wages growth. Since 2014 productivity growth has been just 0.8%. This is down from 2% in the early 2000s.
Identifying the real reasons behind Britain’s pay crisis is vital.
The increasing education levels found within the British workforce boosted pay by 0.7% annually prior to the crash. However, the report said that this effect has been “muted” due to the levelling off of new graduates entering work.
This shift was blamed for a fifth of the overall deceleration in pay. Alongside fewer well-paid jobs being created to replace lower paid roles.
The researchers argue that identifying the real reasons behind Britain’s pay crisis is vital if we’re to make the right interventions to tackle it and get wages growing at a healthy rate again.
Stephen Clarke continued: –
“Our work has shown that there are three core factors behind Britain’s pay problems. People wanting more hours or secure work, a diminishing ‘skills tailwind’, and terrible productivity growth.
“While the first trend is now fading, tackling the other two related problems isn’t easy. But that shouldn’t stop policymakers doing everything they can to address them. As the strength of all our pay rises in the future will ultimately depend on Britain solving its current pay puzzle.”
Britain must get used to “uncomfortable” aspects of the economic “new normal” in the aftermath of the financial crash.
Earlier this year, Bank of England governor Mark Carney stated that Britain must get used to “uncomfortable” aspects of the economic “new normal” in the aftermath of the financial crash.
“We have to reorient ourselves to current realities,” he said after the decision was taken to raise Bank of England interest rates.
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