Wages down more in real terms since 2008 than ever before, says IFS

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Wages down more in real terms since 2008 than ever before, says IFS

Real wages in the UK have fallen since the economic downturn began in 2008 by more than in any comparable five-year period on record. The period since 2008 has also seen productivity levels decline by an “unprecedented degree”, while employment has fallen by much less than in previous recessions.

These are among the main conclusions to emerge from a new analysis by researchers from the Institute for Fiscal Studies published today.

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What’s striking is that these “unprecedented falls” in nominal and real hourly wages have occurred even amongst workers staying in the same job: a third of such workers saw their wages cut or frozen in nominal terms between 2010 and 2011. In other words, it’s not just being driven by employees being made redundant and having to take lower paid jobs.

• In April 2011, average real hourly wages - deflated using the retail prices index - were 4% lower than they were at the start of the recession in April 2008, compared to 5% higher in the early 1980s recession and 10% higher in the early 1990s.
• A third of workers experienced nominal wage freezes or cuts between 2010 and 2011 (12% experienced freezes and 21% experienced cuts) and 70% experienced real wage cuts (on the basis of the retail prices index).
• Average real hourly wages (amongst workers who stay in the same job) have actually fallen faster in the private sector than in the public sector over the last few years, such that the public-private sector wage gap has increased substantially over this period.

Why have real wages fallen?

So why have wages fallen in a way that they have not done in the past recessions. IFS researchers point to two main reasons:

• In part this seems to be driven by greater labour supply. Lone parents and older workers, for example, are not withdrawing from the employment market as they have in previous recessions, which may in part be driven by changes to the welfare system. As a result, workers may be experiencing greater competition for jobs and hence may be more willing to accept lower wages than before.
• In addition, fewer workers are unionised or covered by collective wage agreements now than in the past. 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.

A final word

“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.” - Claire Crawford, Programme Director at IFS and Managing Editor of Fiscal Studies.

Want to know more?

This analysis has been published as part of a special issue of the IFS’s journal Fiscal Studies, June 2013, on the microeconomic consequences of the recession in the UK, and in an accompanying working paper.

The paper is entitled, What can wages and employment tell us about the UK’s productivity puzzle? It was co-authored by Richard Blundell, University College London and IFS, Claire Crawford, IFS, Wenchao Jin, IFS, June 2013. You can download the report in PDF format at www.ifs.org.uk/publications/6749.

IFS states: “Our goal at the Institute for Fiscal Studies is to promote effective economic and social policies by understanding better their impact on individuals, families, businesses and the government's finances. Our findings are based on rigorous analysis, detailed empirical evidence and in-depth institutional knowledge. We seek to communicate them effectively, to a wide range of audiences, thereby maximising their impact on policy both directly and by informing public debate.” To find out more visit www.ifs.org.uk.