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Recession prompted 'unprecedented' fall in wages Recession prompted 'unprecedented' fall in wages
(about 4 hours later)
Wages have fallen more in real terms in the current economic downturn than ever before, according to a report.Wages have fallen more in real terms in the current economic downturn than ever before, according to a report.
On top of the rising cost of living, one third of workers who stayed in the same job saw a wage cut or freeze between 2010 and 2011, said the Institute for Fiscal Studies (IFS).On top of the rising cost of living, one third of workers who stayed in the same job saw a wage cut or freeze between 2010 and 2011, said the Institute for Fiscal Studies (IFS).
"The falls in nominal wages... during this recession are unprecedented," said Claire Crawford from the IFS."The falls in nominal wages... during this recession are unprecedented," said Claire Crawford from the IFS.
This may explain why unemployment has not been higher, she added.This may explain why unemployment has not been higher, she added.
Economists have puzzled over the fact that, since the recession began in 2008, the UK has seen the longest and deepest loss of output in a century - and yet employment has dropped by much less than in previous recessions. The think tank also found the pay gap between public and private sector workers had "increased substantially" in the past four years.
The conundrum is known as the "productivity puzzle". "Despite widespread discussion and acknowledgement of public sector pay restraint… average real hourly wages have actually fallen faster in the private sector than in the public sector over the last few years," it said.
"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, " the report said. In 2009, the average public sector worker earned about £16.60 per hour, which dropped to about £15.80 in 2011, the IFS said. Meanwhile, hourly pay for private-sector workers in 2009 was just over £15.10 and dropped to about £13.60 in 2011.
"This means that workers may be experiencing greater competition for jobs and hence may be more willing to accept lower wages than before." The IFS report comes a day after analysis by union organisation the TUC found pay in some parts of the UK had shrunk by more than 10% since the start of the downturn in 2007.
'Less severe' The TUC blamed the cuts on wages not keeping pace with inflation and changes in hours and employment, such as more part-time working, but business leaders said pay restraint had been crucial in protecting jobs during tough economic times.
The IFS analysis looked at salaries in real terms - which takes the inflation rate into account. 'Productivity puzzle'
The IFS analysis looked at salaries in real terms, which takes the inflation rate into account.
It showed that many UK companies, particularly smaller businesses, have cut wages rather than lay off staff. Larger companies tended to reduce their workforce more but maintain wages.It showed that many UK companies, particularly smaller businesses, have cut wages rather than lay off staff. Larger companies tended to reduce their workforce more but maintain wages.
"To the extent that it is better for individuals to stay in work, albeit with lower wages, than to become unemployed, the long-term consequences of this recession in terms of labour market performance may be less severe than following the high unemployment recessions of the 1980s and 1990s," Ms Crawford said. IFS experts said this could provide an explanation for the so-called "productivity puzzle" - that is, a fall in UK output while employment has held up.
"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," the report said.
"This means that workers may be experiencing greater competition for jobs and hence may be more willing to accept lower wages than before."
Ms Crawford said: "The falls in nominal wages that workers have experienced during this recession are unprecedented, and seem to provide at least a partial explanation for why unemployment has risen less, and productivity has fallen more, than might otherwise have been expected.
"To the extent that it is better for individuals to stay in work, albeit with lower wages, than to become unemployed, the long-term consequences of this recession in terms of labour market performance may be less severe than following the high unemployment recessions of the 1980s and 1990s."
'Less unionised'
In addition, the IFS pointed out that fewer workers are unionised or covered by collective wage agreements and they tended to see smaller wage increases.In addition, the IFS pointed out that fewer workers are unionised or covered by collective wage agreements and they tended to see smaller wage increases.
It also found that inequality has fallen - in sharp contrast to the 1980s recession and its aftermath - and that older workers have been much less affected than younger generations.It also found that inequality has fallen - in sharp contrast to the 1980s recession and its aftermath - and that older workers have been much less affected than younger generations.
A Treasury spokesman said that despite the UK recovering from "the longest and deepest" recession in a century, the labour market had remained strong.A Treasury spokesman said that despite the UK recovering from "the longest and deepest" recession in a century, the labour market had remained strong.
"The government understands the pressures that households face with the cost of living and has taken action to help 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," he said."The government understands the pressures that households face with the cost of living and has taken action to help 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," he said.
On Tuesday the TUC said that total pay in some parts of the UK has shrunk by more than 10% since the start of the downturn in 2007. It said that north-west and south-west England had seen the sharpest cuts - 10.6% and 10.1% respectively. Figures released on Wednesday showed that UK unemployment has fallen by 5,000.
Office for National Statistics (ONS) data indicated 2.51 million people were out of work in the three months to April. The jobless rate was unchanged from three months earlier, at 7.8%.
Average earnings in the period were 1.3% up on a year earlier, thanks to a sharp rise in April bonus payments.