UK Wage Growth

In the post-war period, apart from short-lived recessions, real wage growth was positive, growing at a trend rate of roughly 2%. But, since 2009, wage growth has been much more stagnant with periods of falling real wages

This is latest date for wage growth. In Dec 2025, wage growth was 4.7%, and inflation 3.2%, which means real wages (wage-inflation) was 1.5%

Real wages = nominal wages – inflation

2009-2023 Wage Stagnation

This period was one of the longest periods of falling real wages. It was due to:

Great recession, and fall out from financial crisis which hit UK economy hard.
Depreciation in Pound Sterling, raising the price of imported goods
Rise in cost of living through rising energy/food prices.
Period of low-wage growth/low productivity

Research from the ONS stated that in 2012 real wages have fallen back to 2003 levels. (real wages fall)

Between 2014 and 2016, inflation fell and wage growth picked up. This led to positive real wage growth. The first sustained growth in real wages since pre-2007.

However, this is being overturned by the depreciation of the Pound post-Brexit referendum and continued low growth in nominal wages.

2020-23 Covid Disruption

Source: wages KAC3 – ONS (average weekly earnings) – | CPI inflation (D7G7) ONS | UKEA

After Covid, the UK experienced an inflation shock. Inflation rose to 11% – higher than wage growth. Since then wages have struggled to catch up lost growth

Real disposable income per head

Real disposable income per head is income households have to spend after taxes and benefits. It is closely related to real wage growth but takes into account changes in taxes.

Real Household income per head IHXZ at ONS (discontinued data set)

Average disposable income is very closely related to wages – it also includes non-wage source of income such as benefits-tax

The thing that really stands out is the Limited real income growth since 2009. This is related to poor productivity growth and poor economic growth.

In 2007/08 real median disposable income was £37,310. By 2020/21 that was only a very small increase of £37,622 or less than 1% growth over 13 years.

Minimum wages

Not all wages rise at the same rate. Since 1997, the minimum wage has seen a growth in wages of the low-paid. The minimum wage rate has been increased faster than inflation.

Since 1997, the bottom 10% have seen a relative improvement but the top 25% have seen a ‘relative’ decline.

Importance of Wage growth

Wage growth refers to the rate at which average earnings increase over time. It matters because it affects living standards, inflation, productivity and the overall health of the economy.

1. Living standards

Real wage growth (wages rising faster than inflation) increases purchasing power. But, slow wage growth leads to stagnant living standards
Wage growth allows households to consume more and save

2. Consumer spending and economic growth

Wages are the main source of income for most households
Rising wages support consumer spending, which is a key component of aggregate demand
Stronger demand encourages firms to invest and hire

3. Inflation and monetary policy

Rapid wage growth can increase inflationary pressures, especially if not matched by productivity gains. Higher wages increase both costs and demand in the economy.
Central banks closely monitor wage growth when setting interest rates. A fall in wage growth makes it easier to cut interest rates.

4. Productivity and incentives

Higher wages can:

Motivate workers
Reduce labour turnover
Encourage firms to invest in training and capital

5. Government finances

Higher wages increase income tax and National Insurance revenues
Reduce spending on in-work benefits like universal credit
Helps improve the fiscal position without raising tax rates

Other factors to Consider

Tax Rates – UK has experienced a period of fairly stagnant real wages, but also higher tax rates
Benefit rates – Do low wages get topped up by government benefits.
Unemployment rates. Wages are only any use, if you have a job
Discretionary income. Another factor to consider is the discretionary income of households which takes into account living costs, such as housing, rent and transport. Rising rents and mortgage payments, reduce the effective discretionary income of households.
How many hours worked?

Historical real wage growth

Wood, George H. 1909. “Real Wages and the Standard of Comfort since 1850,” Journal of the Royal Statistical Society 72: 91–103. (Source)

The rise in real wages in nineteenth century were a big factor in reducing absolute poverty.

Historical real wage growth

Source: Touchstone blog (2013) – Source of Data: Bank of England Three Centuries of Data

Average hourly week

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About The Author

Tejvan Pettinger

Tejvan Pettinger. Author of “Cracking Economics” “What Would Keynes Do?” – studied PPE Oxford University (1995-99) and works as an economics teacher and writer.

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