Half of workers experienced a real-terms pay cut last year, despite official data suggesting fastest pay growth in nearly two decades

Sharp pay deterioration among younger workers risks longer-term scarring

Pay growth was far weaker and more volatile last year than official headline data suggests, with half of workers experiencing a year-on-year real-terms pay cut last Autumn, according to the Resolution Foundation’s latest quarterly Earnings Outlook published today (Monday).

The latest Outlook examines what has really happened to pay packets during the pandemic last year, with the official Average Weekly Earnings (AWE) series having been hugely disrupted by widespread furloughing across the labour market.

Nominal average weekly earnings growth reached 4.5 per cent in late 2020 – its highest level in almost two decades (since 2002) – despite the economy experiencing its biggest contraction in over 300 years, and in sharp contrast to the last recession which caused a major pay squeeze.

This level of pay growth feels too good to be true, says the Foundation, and on close examination is too good to be true. Compositional changes in the workforce, such as lower-paid workers falling out through job losses, accounted for half the level of pay growth last year.

The Earnings Outlook also finds large variations in the strength of pay growth across the workforce.

Earnings growth among higher-paid workers (at the 75th percentile) was relatively strong and stable – fluctuating between 2.4 per cent and 2.6 per cent between April and December 2020, after adjusting for workforce composition. In contrast, growth among lower-paid workers (at the 25th percentile) was far weaker and more volatile – fluctuating between 0.2 per cent and 1.4 per cent.

Turning from average pay across the workforce to how individual workers’ pay packets have changed, the Outlook identifies further evidence that earnings growth is far weaker than the headline data suggests.

The median pay rise among individual workers was just 0.6 per cent last Autumn (Q3 2020) – a real-terms pay fall of 0.2 per cent – meaning at least half of all workers experienced a pay cut. The median pay rise increased to 1.8 per cent in Q4 2020 (1 per cent in real terms) – an improvement, but still the second lowest since mid-2013.

Finally, looking at pay growth for workers across the age distribution, the Outlook finds that younger workers have experienced the biggest deterioration in annual pay growth as they have found themselves at the epicentre of the economic crisis.

Among 18-24 year olds who were still in work a year on, annual pay growth fell from 12.3 per cent in 2019 to 6.0 per cent in 2020. Among 25-34 year olds, annual pay growth fell from 4.9 per cent to 1.4 per cent. This pay deterioration comes on top of the fact that younger workers have been more likely to be affected by furloughing and job losses.

The Foundation notes that pay growth fell for all other age groups, and indeed fell in real-terms for workers aged 45-64. However, annual pay growth for workers aged 35 and over is lower anyway as these workers tend to already be settled in their careers, and are less likely to move jobs.

It adds that the sharp falls in pay growth for young workers last year at such a crucial early stage of their careers is hugely concerning as it can potentially scar their pay prospects for years to come. It is vital therefore that pay growth strengthens this year as the economy recovers, though rising unemployment is likely to limit the scope for pay rises.

Hannah Slaughter, Economist at the Resolution Foundation, said:

“The economy experienced its biggest recession in over 300 years last year, with a third of private sector workers put on furlough at its peak. And yet somewhat implausibly, pay growth reached its highest level in almost 20 years.

“Sadly, the story of bumper pay packets from official headline data is too good to be true. In reality, half of all workers experienced a real-terms pay cut last Autumn, with pay growth deteriorating most among those who have been hit hardest by the pandemic – the young, the low-paid, and those working in social sectors like hospitality.

“This pay deterioration is particularly concerning for young workers as it risks scarring their pay for many years to come. The Government should therefore prioritise getting young people’s pay and careers back on track during the recovery, and that is likely to require further policy action beyond that announced in the Budget.”