The gloomy outlook for pay will put austerity under further pressure

Published on Wages & Income

In the five decades leading up the financial crisis in 2008, growth in real weekly earnings turned negative in just 51 months. Yet new figures mark the 72nd month of negative growth in the nine years since, with more on the cards throughout 2017.

Today’s figures leave average pay – in annualised terms – more than £800 below its 2008 peak. Given expectations for the coming years, we’re course for the weakest decade of pay growth since the Napoleonic era.

It hasn’t been nine years of uninterrupted wage pain though. In 2015 we experienced something of a ‘mini-boom’. But too much of that rebound was driven by a temporary drop in inflation associated with falling oil prices. Nominal pay growth picked up a little during this period, but remained worryingly short of pre-crisis norms. As inflation started rising again through 2016 and 2017 – sparked first by rising oil prices and more recently by the effects of sterling depreciation following the vote for Brexit – so the pay squeeze has returned.

But it would be wrong to lay all the blame at the door of inflation. Nominal pay growth has also been slowing recently, falling in each of the last five months’ of data. Indeed, pay packets would be shrinking even if inflation was bang on the Bank’s target of 2 per cent.

This slowdown is all the more surprising given the unemployment rate is at its lowest level since 1975. Economic theory would suggest that such a tight labour market would be pushing wages up. Once again though, the economic textbooks have got it all wrong.

So what’s happening? First, there is likely to be ‘hidden’ slack in the labour market. People are working fewer hours than they’d like and under conditions they’d rather change. As the labour market tightens, it might be that we see these elements of the workplace change before we see pay rises returning. That would certainly fit with what appears to have been a modest reverse in recent months on the take-up of zero-hours contracts and agency work.

Perhaps more important though is the huge uncertainty underlying all aspects of the UK economy in recent years. The turmoil of the early post-crisis years had a clear effect on both business decisions and individuals’ willingness to take risks in the job market. The rate at which people move from job-to-job – a key mechanism by which people boost their pay over the course of their careers – fell sharply and remains subdued today.

Any hope that things were improving on this front was of course dealt a blow by the referendum result, and a hung parliament shifts the UK labour market still further away from stability. Even if the market as a whole recovers in time, the worry is that those young people who have entered the workforce over the last decade remain permanently scarred by their experience.

Business uncertainty also helps to explain under-investment and a terrible record on productivity growth. In the long-term, increasing the amount of output per hour worked is the only way that wages can be increased sustainably. And yet the UK’s performance over the last decade is the weakest since the 19th century.

Coming on the back of what workers have already endured, this fresh pay squeeze is likely to feel all the more painful. Personal borrowing picked up strongly in 2016 as consumer confidence soared and austerity-fatigue kicked in, but there is little chance of that being sustained now that earnings have shifted into reverse. Indeed, there are already signs that consumers are reining in their spending – with important implications for our economic growth. Add in the fact that the working-age benefits of roughly 11 million households have been frozen in cash terms and the wider living standards outlook looks very worrying.

Given this gloomy outlook, it’s astonishing that the economy and living standards barely got a mention in the recent election. That oversight has to end now. After all, the government can help – the rare bit of good news comes from the big pay rises for the lowest earners following the introduction of the National Living Wage. Just as government policy on working age benefit is making a tough situation even worse, so a reversal of that policy can make things better. That would put action behind the ‘end of austerity’ rhetoric currently circulating around Westminster.

This post originally appeared in The Guardian