12th June 2013
British workers have suffered a fall in wages during the financial crisis more severe than that suffered in the 1980s, 1990s and 1930s according to the Institute for Fiscal Studies.
The IFS calculates that workers have suffered unprecedented pay cuts of 6% per cent in real terms. Historically wages have risen by around 2% a year.
It says the crisis is marked out as different this time by a number of factors, not all bad, it must be said.
* The period since the recession began in 2008 has seen the longest and deepest loss of output in a century and the largest public sector deficit since the Second World War.
* Real wages have fallen by more than in any comparable five year period.
* Productivity levels have dropped to an unprecedented degree.
* Employment has dropped by much less than in previous recessions.
* Inequality has fallen in sharp contrast to the 1980s recession and its aftermath.
* Older workers and consumers have been much less affected than younger generations.
The IFS analysis also grapples with what it calls the “productivity puzzle” or in other words why employment has fallen less than output and hence why output per worker and output per hour has fallen so far.
Seeking an explanation, the IFS says that productivity has fallen within many firms especially amongst smaller firms.
For example, it notes that firms with fewer than 50 employees have seen their productivity fall 7% relative to a pre recession trend, compared to no change for firms with more than 250 employees.
The IFS says larger firms have tended to lay off workers while smaller firms have tended to reduce wages while investment has also fallen further in small firms.
It adds: “The fall in productivity has been accompanied by unprecedented falls in nominal and real hourly wages in the UK, which have occurred even amongst workers staying in the same job: one third of such workers saw their wages cut or frozen in nominal terms between 2010 and 2011.”
The IFS says much of the explanation rests with the labour market supply. “Lone parents and older workers, for example, are not withdrawing from the labour market as they have in previous recessions, which may in part be driven by changes to the welfare system. This means that workers may be experiencing greater competition for jobs and hence may be more willing to accept lower wages than before. In addition, fewer workers are unionised or covered by collective wage agreements now than in the past. Wage growth since 2008 has tended to be lower amongst workers who were not covered by such agreements, and they were more likely to experience nominal wage freezes in 2011,” it adds.
Commenting on these findings, Claire Crawford, Programme Director at IFS and Managing Editor of Fiscal Studies, 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.
“To the extent that it is better for individuals to stay in work, albeit with lower wages, than to become unemployed, the long term consequences of this recession in terms of labour market performance may be less severe than following the high unemployment recessions of the 1980s and 1990s.”