Pay
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Economic growth

Growth up, wages down: something has to give

Matthew Whittaker
Matthew Whittaker

In Growth up, wages down we consider the relationship between growth, consumption, investment, incomes and earnings in order to ascertain just how far wage growth might need to rise in order to set the economy back on track.

For the purposes of illustration we consider the magnitude of wage growth that might be required to return GDP growth to its historic trend through to 2018. Our findings suggest that average earnings would need to rise by more than 2 per cent a year in real terms from 2015. This is lower than the growth achieved during the late 1990s (2.8 per cent a year), but higher than that experienced during the early-to-mid 2000s 1.7 per cent a year).

Key findings

  • The findings point to the need for focusing attention on restoring healthy wage growth, but also on the need for a more balanced economic recovery. Dis-saving, borrowing and a reduction in future savings – measured by a decline in the household saving ratio – may play some role by helping to support consumption even as incomes remain flat. But there is likely to be limited scope for further falls given how highly leveraged the household sector remains as a result of the debts built up in the pre-crisis years. Even though net worth has risen at the aggregate level, the unequal distribution of wealth – which has become even more skewed over the course of the downturn – means that the option of running down assets can only take us so far.
  • Instead, sustainable growth is likely to be reliant on an above-trend contribution from gross capital formation. There are signs that housing investment has helped to boost the capital figures over the course of 2013 and there may be more to come but, with the Bank of England already intervening to prevent any over-heating in that sector, longer term pick-up in capital is likely to rest instead on strong growth in business investment. Whether this is forthcoming is one of the key questions hanging over the recovery.

Further reading

Decent exposure
An overview of how Britain’s exposure to trade has changed
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Sophie Hale
Local roots of trade routes
The UK’s regional services trade over time
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Emily Fry, Will Barlow
Pressure on pay, prices and properties
How families were faring in October 2023
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Mike Brewer, Felicia Odamtten, Hannah Slaughter, Hannah Slocombe, James Smith
Matthew Whittaker
Matthew Whittaker