Real-terms pay drop 'unprecedented'
Wages have fallen by more in real terms during the current economic downturn than ever previously recorded, according to new research which found an "unprecedented" impact even on workers who have kept their jobs.
One-third of workers who stayed in the same post following the recession suffered a cut or freeze in their wages in cash terms in 2010-11, according to analysis by economic think-tank the Institute for Fiscal Studies.
Once inflation is taken into account, real-terms pay has fallen by more since the recession began in 2008 than in any comparable five-year period, said the think-tank in a working paper for the magazine Fiscal Studies. This may provide some of the explanation for the so-called productivity puzzle which has seen output fall in UK companies while employment has held up, IFS experts suggested.
They found that many UK companies, particularly smaller businesses, have cut wages rather than lay off staff. Workers have been willing to accept pay reductions because of the fierce competition for those jobs which are available.
Competition for jobs has in part been driven by the fact that lone parents and older workers have not withdrawn from the labour market to the extent they did in previous downturns, possibly because welfare reforms make it more difficult for them to do so, the report found.
Fewer workers are unionised than in the past and those who are not protected by collective wage agreements are more likely to have seen their pay cut or frozen.
Fiscal Studies managing editor Claire 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."
The research found that the period since 2008 has seen "the longest and deepest loss of output in a century" but that the downturn is different from previous slumps. Productivity levels have fallen "to an unprecedented degree" but employment has held up far better than in previous recessions and inequality has declined, in sharp contrast to experiences in the 1980s.
Smaller firms, which have tended to respond to the tighter economic conditions by cutting wages, have seen productivity fall by an average 7% while firms with more than 250 employees, which were more likely to lay off staff, have seen no change in productivity. Younger generations have been hit much harder by the downturn than older workers and consumers, the report found.
A Treasury spokesman said: "As the IFS says, the UK is recovering from the 'longest and deepest' recession in a century. Despite this, the labour market has remained strong: one-and-a-quarter-million private sector jobs have been created and more people are in private sector employment than ever before."