Wage growth is a key factor in determining living standards, aggregate demand and inflation. Since the great recession of 2008, nominal wage growth has fallen behind the headline inflation rate causing a significant drop in real wages.
Research from the ONS, stated that in 2012 real wages have fallen back to 2003 levels. (real wages fall) Between 2010-12, there has been an annual average drop in real pay of nearly 3%. Unfortunately, this trend looks to be continuing in 2014.
Recent wage growth in UK
Until May 2008, wage growth was above inflation, causing positive real wage growth. But, since 2008, the UK has seen negative real wage growth.
Wage growth since 2000
During the great moderation, we saw a steady period of rising real wages. This has been reversed since the prolonged recession of 2008 onwards.
Real wage growth
Economic implications of recent wage trends
1. Muted inflationary potential. Some economists have worried that there is a risk of inflation from ultra low interest rates. During the great depression, we saw cost push inflation, but this has evaporated because they were just temporary factors, such as rising oil prices, higher taxes e.t.c.
This shows the importance of wage growth for determining underlying inflationary trends. Whilst wage growth remains low, there is muted potential for any inflation.
2. Accommodative monetary policy. A consequence of the above is that if inflationary pressures are low, and real incomes falling, this puts more pressure on the Bank of England to pursue a loosening of monetary policy rather than tightening. If real wages were rising rapidly, then it would make sense to reverse quantitative easing and put up interest rates. But, falling real wages suggest the opposite.
3. Muted Unemployment. The fall in real wages may be having a positive effect in reducing the unemployment rate. In previous (milder) recessions, the UK has seen a bigger increase in unemployment. But, in this recession, unemployment has not increased as much as we might expect. One reason to explain the UK unemployment mystery is falling real wages making labour less expensive. It helps reduce real wage unemployment.
4. Low labour productivity growth. The UK has seen disappointing labour productivity growth in recent years. Falling real wages are one reason which explains this poor labour productivity growth. With lower wages, firms more willing to hang onto workers and accept lower productivity levels. See: Labour Productivity.
5. International competitiveness. Lower wages will help UK exports to be competitive. However, this competitive advantage is reduced because of poor labour productivity growth and also the fact that many countries are experiencing low wage growth as well.
6. Economic growth. Until recently the fall in real wages matched the decline in real GDP and negative economic growth.
However, since the start of 2013, the economic recovery has not been matched by rising real wages, which raises concerns about the balanced nature of the UK recovery.
7. Increased relative poverty. Falling real wages have increased relative poverty. There is more concern over fuel poverty and food poverty, with rising living costs leaving people struggling to afford the basics.
- Wage growth stats from Labour Force Survey ONS. Wage growth stats are for 3 month average