UK wage growth at its lowest in years

Wage growth in the UK is at its lowest in 210 years. Workers’ real wages have apparently not grown at all since 2007, and the situation is unlikely to change before 2022.

Although employment opportunities are set to increase, average household income will fall £12,000 by 2020, with social welfare contraction expected to exacerbate the situation.

 

Worst slump since Napoleonic wars hits household incomes

As part of its 2017 spring budget statement, HM Treasury reported analysis and estimates by a variety of research institutes. The analysis was mainly pessimistic, given that UK wage growth last year, at 2.3%, was around half that recorded in the US (4.47% in February, US Department of Labor statistics).

The Institute for Fiscal Studies indicates that workers in the UK face a 15-year wage freeze. With little likelihood of the average wage in 2020 being higher than that in 2007, sharp inflation triggered by Brexit, and anticipated contraction in social welfare benefits, more families are expected to fall into financial difficulties.

According to the UK think tank Resolution Foundation, UK households will endure income reduction equivalent to £12,000 on average by 2020. Resolution says that the last time that UK wage growth was so poor was during the 1803-15 Napoleonic wars, and wage growth will not recover to its level at the time of the financial crisis in 2008 until at least the end of 2022.

 

IFS only forecasts growth among low-wage jobs

All this is surprising, because the UK unemployment rate has fallen to 4.7% (UK Office for National Statistics, February 2017). This runs counter to the maxim that unemployment falls and wages rise when the economy grows.

The proportion of people in employment is indeed rising in the UK. Although the UK rate of employment fell after the economic crisis from the 72% level to around 70% at one point, it recovered significantly from 2012, breaking through 74% in 2016.

However, although the unemployment rate itself reached its lowest level in 11 years, the number of unemployment benefit claimants increased.

The Office of National Statistics employment rate covers those aged 16-65, taking no account of unemployment conditions or wages.

Institute for Fiscal Studies director Paul Johnson points out that half of the growth in the employment rate since the economic crisis is attributable to participation in the labor market of older people and the self-employed. He predicts that, although the rate of employment will continue to grow, the growth will center on low-paid jobs.

 

Underinvestment means 60% of capacity is in London

Source: Shutterstock

The biggest problem facing the UK is a remarkable drop in labor productivity. Productivity is an important factor in promoting long-term economic growth and, according to 2015OECD data, labor productivity in the UK ranked 15th among its 35 affiliated countries. At US$52.10, nominal value-added per hour worked was only half the level in Luxembourg (US$93.40) which tops the list.

Reduction in labor productivity is a phenomenon visible in many developed countries. However, Bank of England research has revealed a distorted picture in the UK, with 60% of key growth capacity concentrated in London.

British journalist Martin Wolf attributes this concentration of capacity to issues deeper than Brexit, citing underinvestment in many areas, most notably in research and development. According to the UK government’s own data, since the financial crisis, the weighting of investment within GDP has been stubbornly low, at around 16.5%. In terms of infrastructure, the UK ranks sixth among the G7, with data clearly lower than the average for OECD countries.

 

Training environment is problematic, given skills gap and higher student loan burden

Another important issue is the skills gap. Although a major government campaign has raised university attendance, question marks continue to surround training in practical skills. Skilled jobs are often filled by overseas workers, with an increasing number of young people, many of them graduates, faced with the choice of low-paid work or unemployment.

The cost of a university education, which used to be free, has risen each year, and average annual fees seem set to top £9,000 from this fall. Many students take out student loans and it seems likely that inflation will push the interest on these loans to a high of 6.1% this year, putting further pressure on the finances of young people, who are already struggling with high housing costs

It would not be surprising if more young people opt to avoid a lifetime of debt by not going to university, which could in turn further undermine productivity. The UK government has at last begun to emphasise development of the employability of its own young people. However, after a long period of decline, it is likely to be a while before productivity recovers.

(By ZUU Japan)

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