There’s been nothing like it in modern times. First there was a recession of extraordinary severity. Then there has been the strangest of recoveries that has seen record numbers of Britons in work but the average worker poorer than before the sky fell in. A lot poorer.
The curious story of the UK economy from 2008 to 2014 is sketched out by the Institute for Fiscal Studies today. Dry and dusty it might seem, but the thinktank’s study of “earnings since the recession” tells the story of how the UK sacrificed pay for jobs.
This was a break with the past. In previous downturns the victims were those who lost their jobs. Pay for those fortunate enough to stay in employment tended to rise. This time everybody (or nearly everybody) has been a victim. Unemployment has not risen by nearly as much as might have been predicted given the depth of the recession. Rather than a minority of the population suffering a lot of pain, the majority of us have suffered a smaller amount of pain.
That’s not to say the hit to earnings has been chickenfeed. Far from it. The trend since the second world war has been for earnings to grow more rapidly than prices, leaving people better off year by year. If this pattern had continued, the average worker’s real inflation-adjusted pay would have been 12%-15% higher in 2014 than in 2008. In fact, depending on the yardstick used to measure pay, earnings were anything from 3% to 7.4% below their pre-crisis level.
All groups lost out: those in the top 10% of earners and those in the bottom 10%; both public and private sector workers; those in their late teens and early 20s looking for their first job and those in their 60s wooed back into the workforce. In this respect, George Osborne was right: we have all been in it together.
But the losses have not been distributed equally. Women have done less poorly than men, primarily because they are more disproportionately likely to work in the public sector, where real earnings have fallen by less than in the private sector. Weekly earnings for a woman smack in the middle of the income distribution (the median) fell by 2.8% between 2008 and 2014; for the equivalent man they fell by 9%.
This, though, is largely the result of private sector earnings responding rapidly to the deep plunge in output in 2008 and early 2009, a period when public sector pay continued to rise. Since late 2009, however, earnings in the public and private sector have fallen by similar amounts.
The other big group to suffer badly has been the young, where median weekly earnings for a 22- to 29-year-old were more than 10% lower in 2014 than they were in 2008. Pay rose slightly in the early stage of the recession, fell sharply between 2009 and 2011, and has continued to fall gently since.
The IFS analysis excludes two important groups: the self-employed and the very rich. Such evidence as there is suggests that the fall in earnings would be even bigger were the self-employed included. The IFS also says real earnings “have, if anything, fallen by somewhat less at lower points in the earnings distribution”. This may have something to do with the squeeze on public sector pay, which began in 2011. The minimum wage has also helped protect those on the lowest wages.
Some other key issues arise from the IFS report. The reason there is some dispute about the precise fall in earnings is that the data is collected in a variety of ways: the Annual Survey of Hours and Earnings (ASHE); average weekly earnings (AWE) and the Labour Force Survey. The size of the fall also depends on which measure of inflation is used. The IFS’s preference is to use ASHE as its measure of earnings with the Consumer Prices Index including housing costs as its benchmark for inflation.
The years since the turn of the millennium have not been a golden age no matter which measure is used. Earnings were 5% higher in 2014 than in 2001 using AWE and 6.7% higher using LFS. Using ASHE they were 1% lower.
A second important finding is that the falls in real earnings would have been even greater had it not been for the fact that the workforce is becoming better educated and older.
Thirdly, it is unclear why the fall in earnings has been so marked. The IFS explanation for the squeeze is that productivity growth has been negligible, although this raises the question of why this has happened. A fall in investment and the ability of firms to replace expensive capital with cheap labour is one possible explanation.
Finally, there’s the question of what happens now. Real earnings have started to rise at a faster rate, but mainly because inflation is falling due to crashing oil prices. At the current rate, regaining the ground lost since the recession will take years.
