TUC's Duncan Weldon: UK Policy Makers Need to Take Weak Wage Growth Seriously

In an authoritative study published two weeks ago the Office for National Statistics (ONS) looked, in detail, at the real wage squeeze in the UK.

It found that real wages (wage growth minus inflation) have been falling consistently since the end of 2009, the longest squeeze since modern records began in 1964. TUC analysis of historic data suggests this is the longest fall in real wages since the 1870s.

The current political debate around the "cost of living crisis" is in reality a debate around weak wage growth. CPI inflation is now at 2.0% (in line with the Bank of England's target for the first time in several years) and yet households continue to feel worse off – the reason is that wage growth is running at around 1.0%. Whilst the pace of price rises has slowed in the past 18 months, so has the pace of wage growth. Lower inflation is not yet feeding through into rising real wages.

In the years before the economic crisis of 2008, average weekly earnings grew at around 4% a year whilst since the crisis they have grown by more like 2.0% – and 1% in recent months.

The most striking ONS finding was that this is part of a longer term trend. In the 1970s and 1980s real wage growth averaged an annual 2.9%, in the 1990s this slowed to 1.5%, in the 2002 to 1.2% and in the 2010s to a fall of 2.2% a year. Whilst the recent painful falls in real wages have grabbed policy makers and commentators attention, they should be seen in the context of several decades of slowing real wage growth.

There is now a very real fear that wages in 2020 will not be much higher than in 2010. Britain's workforce could experience a decade long wage freeze.

The ONS analysis concentrated on average (mean) real wages which may, for many, understate the scale of the problem. Inequality has increased since the mid-1990s with the share of income taken by the top 1% rising from 7% to 11%. Wage growth for high earners pushes up the overall average and may distort the figures.

Work by the Resolution Foundation has focused on median (or middle) real wages and presents a much starker picture. It found that from 2003 until 2008, the five years before the crash, real median wages were basically flat despite the economy growing by 11%.

Real household disposable income (a broader measure than simply wages, taking into account the tax and benefit system and other sources of income) is currently 1% below its level of 2008. At this point in the 1990s and 1980s recovery from recession it was up by 15% and 13%.

Whichever measure one chooses to use, Britain has experienced an unprecedented wage squeeze and household incomes have been unusually weak.

Whilst the recession has provided the catalyst which knocked weak real wage growth into actual negative territory it would be a mistake to focus purely on the post-2008 data. The problem is much longer running and has a wide variety of causes. Globalisation and new technologies have led to a more polarised labour market – many traditional middle-income jobs have disappeared causing what economists call 'jobs market polarisation', the growth of jobs at the top and the bottom. Trade union bargaining coverage has fallen substantially, strengthening the hand of firms over their workforces. Policy-makers, for several decades, have tended to focus on GDP growth and assume that this will automatically flow through into rising household incomes.

The recovery that the UK has experienced since mid-2012 has been driven by household spending. But this spending has been underpinned by falling household saving and increased debt rather than real income growth. As the Bank of England made clear this week, without rising household incomes this will eventually prove unsustainable.

The news on real wages looks set to get better. Most forecasters, from the Bank of England to the CBI, now expect that wage growth will be faster than inflation by the middle of this year. But even the most optimistic forecasts still point to historically weak real wage growth. It could well be the early 2020s before median real wages return to their pre-crisis level.

If policy-makers are serious about tackling the "cost of living crisis" and making sure that economic recovery flows through into rising living standards, then they need to take wage growth seriously – not just at the bottom in terms of spreading the living wage and boosting the minimum wage, but in the middle too.

Duncan Weldon is senior economist at the Trades Union Congress