In­fla­tion squeezes UK liv­ing stan­dards


Bri­tish wages have dropped in real terms for the first time in nearly three years as em­ploy­ers re­main re­luc­tant to of­fer big­ger pay rises against a back­ground of ris­ing in­fla­tion.

Wages in Bri­tain have dropped real terms for the first time in al­most three years as em­ploy­ers re­main re­luc­tant to of­fer big­ger pay rises in spite of the ac­cel­er­a­tion of in­fla­tion.

The jobs mar­ket was oth­er­wise ro­bust with record em­ploy­ment rates and the low­est un­em­ploy­ment since 1975, of­fi­cial data showed.

But the re­newed squeeze on Bri­tons’ liv­ing stan­dards marks a turn­ing point for the econ­omy: real wages fell sharply af­ter the fi­nan­cial cri­sis but had been re­cov­er­ing slowly in re­cent years.

“Com­ing so soon af­ter the big postcri­sis pay squeeze, this new phase of fall­ing pay means that this decade is set to be the worst in over 200 years for pay pack­ets,” said Stephen Clarke, an eco­nomic an­a­lyst at the Res­o­lu­tion Foun­da­tion think-tank.

The lat­est of­fi­cial fore­casts sug­gest the av­er­age UK­worker will still earn less in 2021 than they did in 2008. In­equal­ity is also ex­pected to in­crease in the next few years be­cause the ben­e­fits that top up the in­comes of low-paid work­ers have been frozen in cash terms.

The labour mar­ket has be­come a bat­tle­ground in the gen­eral elec­tion cam­paign. Both the Con­ser­va­tives and Labour have promised to boost low pay and strengthen work­ers’ rights.

Av­er­age reg­u­lar weekly pay in the three months to March was 0.2 per cent lower than a year ago af­ter tak­ing ac­count of in­fla­tion. Reg­u­lar pay (ex­clud­ing bonuses) rose 2.1 per cent, slightly less than in­fla­tion in the same pe­riod. To­tal pay (in­clud­ing bonuses) rose slightly faster than in­fla­tion.

In­fla­tion sub­se­quently ac­cel­er­ated to 2.7 per cent in April, which sug­gests the squeeze on pay is likely to in­ten­sify in the com­ing months.

The Bank of Eng­land re­cently cut its fore­cast for av­er­age wage growth this year from 3 to 2 per cent, but ex­pects real pay growth to re­sume next year.

There was bet­ter news on job cre­ation as em­ploy­ers con­tin­ued to hire more staff. The em­ploy­ment rate breached a new record high of 74.8 per cent af­ter an­other 122,000 peo­ple found work, a big­ger num­ber than econ­o­mists were ex­pect­ing. They were also en­cour­aged by the types of jobs that were cre­ated. The num­ber of full-time em­ploy­ees surged while part-time and self-em­ploy­ment fell. Mean­while, the un­em­ploy­ment rate dropped to 4.6 per cent, the low­est since 1975.

Still, em­ploy­ers’ re­fusal to raise pay has puz­zled econ­o­mists. Work­ers usu­ally de­mand higher pay rises when in­fla­tion goes up and their bar­gain­ing po­si­tion should be strength­ened by the tight­ness of the labour mar­ket. The same puz­zle is play­ing out in Ja­pan, the US and Ger­many, where un­em­ploy­ment is sim­i­larly low but wages re­main weak.

Em­ploy­ers say they can­not raise pay sus­tain­ably un­less work­ers be­come more ef­fi­cient. Yet pro­duc­tiv­ity, which has stag­nated in the UK since the fi­nan­cial cri­sis, fell 0.5 per cent in the first quar­ter of the year as work­ers pro­duced less out­put for ev­ery hour they worked.

Pro­duc­tiv­ity has slowed in most coun­tries since the fi­nan­cial cri­sis, but the trend has been acute in the UK.

Some econ­o­mists be­lieve the weak­ness of wage growth is also the re­sult of struc­tural shifts that have left work­ers with less bar­gain­ing power.

“A shift to­wards less se­cure forms of em­ploy­ment, the tight­en­ing up of el­i­gi­bil­ity for ben­e­fits and the con­se­quences of glob­al­i­sa­tion have all made work­ers more com­pli­ant and less will­ing and able to push for higher wages,” said Martin Beck of Ox­ford Eco­nomics.

Oth­ers be­lieve mi­gra­tion from the EU has pro­vided a “pres­sure valve” that means em­ploy­ers have not had to raise pay.

The num­ber of work­ers in Bri­tain from the EU rose un­ex­pect­edly in the three months to March af­ter a fall in the pre­vi­ous set of data. Their ranks in­creased by 171,000 to 2.32m in spite of in­creased un­cer­tainty about Brexit.

The av­er­age UK worker is fore­cast to earn less in 2021 than in 2008

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