Yes, wages are falling, but the alternative could be far worse

August 16, 2013

As the next election edges closer and opinion polls show the gap between Labour and the Conservatives closing, the arguments that the main parties will be taking into 2015 are, albeit slowly, starting to take shape.

This week saw the House of Commons Library release statistics showing that the 5.5% contraction in real wages that the UK has seen since the third quarter of 2010 is more severe than in most other European economies. The Labour party is starting to use this statistic as the core of their attack on the government (and in particular the Conservatives) as the shadow cabinet and Labour backbenchers adopt the “cost of living crisis” catchphrase, with a level of enthusiasm not seen since the resurrection of “One Nation” at Labour Conference last October.

Meanwhile we have seen two quarters of reasonable economic growth, a double dip being revised away and, more recently, some of the strongest measures of economic confidence seen in years. Conservative MPs respond by welcoming employment growth and tweeting statistics about the falling claimant count in their constituencies.

This starts to paint a slightly mixed view of the condition of the UK labour market; the same is often visible in the media reports. The Independent described wage figures as putting “Britain in Europe’s bottom four”. Meanwhile the Times reported that “Robust jobs data” might challenge the Governor of the Bank of England’s plan to wait for unemployment to fall before increasing interest rates.

Given the scale of the recession seen in the UK and its slow recovery it is right that these issues are making headlines. However too often wages and unemployment are treated in isolation and the government of the day blamed or congratulated, depending on what statistic is being looked at.

In reality they are two sides of the same coin; as the economy contracts there is less demand for workers and less money to pay people with. Something has to give. In previous recessions and across much of Europe today we have seen wages hold up and unemployment rise steadily. This is in stark contrast to the UK case where real wages have fallen sharply and unemployment has risen by less than it might otherwise have. This is clear in the data.

Consider Spain. According to these statistics wages have fallen by 3.3%, two fifths less than the fall in the UK. However unemployment stands at 26%, compared to less than 8% here. In the face of public sector job cuts and a rising proportion of the population that want to work, unemployment not rising to levels seen in previous recessions and across Europe is a genuine success.

Labour market flexibility is often discussed in terms of how easy it is to hire and fire; that one consequence of this flexibility lies in wages may therefore come as a bit of a surprise. The reality is that this flexibility manifests itself in all aspects of employment. Yes, firms can let people go more easily so to avoid going out of business. However we have also seen employers and local flexible unions negotiating a temporary four day week or temporary wage restraint. The UK leads when it comes to this flexibility.

For the families experiencing it, falling wages is painful; however there is a reason that unemployment makes the biggest headlines. Unemployment when young affects job prospects and wages for the rest of somebody’s life. As Policy Exchange has shown, this effect is even larger among older people who find themselves out of work. The idea that unemployment, and in particular the very emotive youth unemployment, could be higher is a frightening one with scars damaging lives for years to come and the capacity of the UK economy affected.

“Any job is better than no job” is unlikely to offer much consolation to a family who are seeing the value of their income fall and their living standards squeezed. However without significant economic growth we face a trade-off between unemployment and wages. Today the UK lies on the right side of that trade-off.

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