Labour market The impact of unemployment reaches beyond the out-of-work 4 October 2012 by Matthew Whittaker Matthew Whittaker It’s a fairly obvious point that pay rises are connected to unemployment levels: the more people there are ready to step into work, the less scope employees have to push for higher wages. Of course the connection is not quite so straightforward in practice, and pay trends are affected by many more factors than unemployment alone. But data drawn over time and across countries points to a clear relationship. Perhaps unsurprisingly, the impact is more marked at the lower end of the earnings distribution than in the top half. This reflects the fact that the unemployed are more often drawn from the less skilled, meaning that they are closer substitutes for lower paid workers. As the chart below – taken from our recent publication, What a Drag – shows, the magnitude of the difference is startling. A hypothetical doubling of unemployment would be expected to reduce real wages at the 10th percentile by 22 per cent (or more than £3,000 a year), compared with just 11 per cent in the top half of the distribution. Source: P Gregg & S Machin, What a drag: the chilling (and growing) impact of unemployment on real wages, Resolution Foundation, September 2012 Perhaps more importantly, the relationship between real wages and unemployment appears to have intensified over the last decade. At every point of the distribution, the impact of unemployment on pay appears to have been considerably worse between 2003 and 2010 than it was from 1986 to 2002. All of which means that wage recovery – especially for low and middle earners – appears some way off and will depend in no small part on bringing unemployment down. The shift in the relationship between wages and unemployment mean that getting people back into work matters not just for those directly affected; it is an essential pre-condition to securing sustainable wage growth.
