12 Jun 2013

Unprecedented’ fall in wages during downturn

Wages fall more in real terms than has ever been recorded before, putting pressure on people’s standard of living, according to new research.

A report by the Institute for Fiscal Studies (IFS) says the economic downturn has had an “unprecedented” impact on employees who have retained their jobs.

A third of workers who stayed in the same job following the recession suffered a cut or freeze in their wages in cash terms in 2010-11.

Once inflation is included, real-terms pay has fallen by more since the recession began in 2008 than in any comparable five-year period.

The IFS says many firms, particularly smaller ones, have cut wages rather than lay off staff, with workers willing to accept pay reductions because of the fierce competition for available jobs.

‘Wages fall 10 per cent’

Pay in some parts of Britain has fallen by more than 10 per cent since 2007, according to the Trades Union Congress, with the north west and south west of England hit hardest.

The real-terms fall in wages has had an effect on people’s spending habits, which is one of the reasons the recovery has been slow.

The IFS report coincides with the latest official jobs figures, which show that unemployment fell by 5,000 to 2.51 million (7.8 per cent) in the three months to April.

A feature of the downturn is that while output has fallen sharply, unemployment has not risen as much as might have been expected.


Competition for jobs has in part been driven by the fact that lone parents and older workers have not left the labour market in the way they have in previous downturns, possibly because welfare reforms make it harder for them to do so, according to the IFS.

Claire Crawford, from the IFS, said: “The falls in nominal wages that workers have experienced during this recession are unprecedented, and seem to provide at least a partial explanation for why unemployment has risen less, and productivity has fallen more, than might otherwise have been expected.

“To the extent that it is better for individuals to stay in work, albeit with lower wages, than to become unemployed, the long-term consequences of this recession in terms of labour market performance may be less severe than following the high unemployment recessions of the 1980s and 1990s.”

‘Longest and deepest’

The research shows the period since 2008 has seen “the longest and deepest loss of output in a century”, but that the downturn is different from previous slumps.

In particular, younger people have been hit harder than older generations. The latest unemployment figures show the numbers of over-65s in work has reached a record one million.

Total employment, at 29.7 million, is at a record high.

A Treasury spokesman said: “As the IFS says, the UK is recovering from the ‘longest and deepest’ recession in a century.

“Despite this, the labour market has remained strong: one-and-a-quarter-million private sector jobs have been created and more people are in private sector employment than ever before.”