Labour Research October 2014


Why Britain needs a pay rise

The TUC-organised demonstration on 18 October is making the case that “Britain Needs a Pay Rise”. Labour Research examines the backdrop.

In what is one of the slowest recoveries on record, earnings have fallen in value to an unprecedented extent. And, as TUC general secretary Frances O’Grady points out, the economy seems to be very good at creating low-paid jobs, but is “struggling” to create better-paid work. Action is needed to make work pay.

In a clear sign that something is badly wrong, the Office for National Statistics (ONS) revealed in August that pay, including bonuses, was 0.2% lower than a year earlier. Joe Grice, ONS chief economist, felt it necessary to explain that this was partly due to unusually high bonuses in April last year.

That’s relevant because the size and timing of bonus payments — especially for City high fliers — can have quite an impact on earnings statistics (£14.4 billion out of £40.5 billion in bonuses paid in the year to April was in finance and insurance).

But Grice had to admit that “underlying pay growth” excluding bonuses is also low. The increase in regular pay in the year to April-June was only 0.6% and the average of annual increase announced each month since June 2009 has been just 1.5%.

It all adds up to a continuing real-terms pay cut because (after a brief period of negative inflation in 2009) the Retail Prices Index (RPI) has risen much faster than earnings: 4.6% in 2010, 5.2% in 2011, 3.2% in 2012; 3.0% in 2013; and 2.6% so far in 2014.

The TUC reckons workers are, on average, around £40 a week worse off. Speaking at September’s TUC Congress, Mark Carney, Bank of England governor, confirmed that there has been a 10% fall in incomes since the crisis.

There are different ways of measuring this and, as the general election draws nearer, the figures will be hotly debated.

Researchers at the National Institute for Economic and Social Research (NIESR) have looked at a range of statistics and take a view that between 2008 and 2013, wages fell by around 8% or about £2,000 for a typical worker, but that the fall has been worse for young workers (see box on page 15). Since then, earnings have been eroded even further.

While this represents a massive drop in income for ordinary workers, the NIESR estimate was a cautious one, using the Consumer Prices Index (CPI) which generally indicates a lower rate of inflation than the RPI.

And, even so, CPI increases of 2.2% in 2009 (when the RPI was negative, due to mortgage rate cuts), 3.3% in 2010, 4.5% in 2011, 2.8% in 2012, 2.6% in 2013 and 1.7% so far this year confirm that the value of wages has been eroded.

When it comes to pay bargaining, unions have generally been doing better than these figures suggest (except for the public sector).

Annual surveys based on the Labour Research Department Payline database show that the mid-point in pay settlements fell from 3.9% in 2008 (pre-recession) to 2.65% in the year to July 2009; 2.0% in 2010; 2.75% in 2011; and 2.5% in 2012, 2013 and again in 2014 (a provisional figure).

Compared to RPI inflation, that adds up to a fall in the value of basic pay of over six percentage points between 2010 and 2014. Pay settlements are now running close to the current rate of inflation and there is little sign so far of “catch-up” bargaining.

The drop in real earnings

Since the 2008-09 recession, the UK has experienced a fall in real wages that is “historically unprecedented, certainly in the past 50 years w here broadly comparable records exist”, according to researchers at the National Institute of Economic and Social Research (NIESR).

It is reflected in evidence from three different Office for National Statistics surveys: the Monthly Survey of Wages and Salaries on which the Average Weekly Earnings statistics are based; the Labour Force Survey (LFS); and the Annual Survey of Hours and Earnings (ASHE).

Depending on which figures are used, the fall in earnings has been as dramatic as

-2.16 percentage points per year (in the case of average annual earnings in the ASHE survey) or, most optimistically, as “low” as -0.66 points (based on average hourly earnings in the LFS).

Estimates of the overall fall in wages up to 2013 therefore vary between 4% and 11%, with 8% (based on ASHE figures) representing a balanced picture.

But for 25- to 29-year-olds it has been 12%, and for 18- to 24-year-olds, 14%, taking real wages back to levels last seen in 1998.

Public sector pay falls behind

Pay restraint and caps mean a nearly 12% gap with retail prices has built up in the public sector, as Carney recognised — “across the economy the hit in the public sector has been larger”.

After three successive years of pay freezes, and below-inflation rises in 2013 and 2014, local government unions put the loss even higher, at 18%. Frustration is set to boil over into strikes and demonstrations in October, following successful national strike action on 10 July.

Shift from full-time employment

The fall in real earnings seems in part to reflect changes in the sort of work that is on offer. Although there has now been a welcome rise in full-time employment, the proportion of working age people who are full-time employees (62.3%) is still below its 2008 level (64.4%) while other forms of work are flourishing.

Involuntary part-time working (people in part-time posts who’d rather have a full time job) is 90% higher than in 2008. Involuntary temporary work is 67% higher; self-employed part-time work 43% higher; self-employed full-time work 24% higher; and employee part-time working generally, 4% higher, according to Anjum Klair from the TUC’s economics and social affairs department.

Lower earnings among newly-appointed workers have dragged the rate of earnings growth down since 2010, according to the Annual Survey of Hours and Earnings 2013 Provisional Results Published by the ONS.

Compared with overall rises of 2% or less, those in post for at least one year saw gross weekly earnings rise annually by 3% to 4%.

Earnings in some industries have clearly been harder hit than others, such as real estate; education; accommodation and food service activities; construction; arts, entertainment and recreation; and information and communication according to ASHE. And the NIESR report highlights big falls in real earnings for younger workers.

Self-employment, which has risen to 4.6 million, is increasingly low paid and accounted for more than half of the rise in employment over the past six years (732,000 out of 1.1 million more workers). Geoff Tily, TUC senior economist, said: “Not only has there been an unprecedented shift to self-employed work, this work is increasingly lower paid relative to employment.”

Laura Gardiner, senior researcher and policy analyst at the Resolution Foundation think tank, argues that if the self-employed had been included in the earnings statistics, the decline might have been 20% to 30% greater than it actually was. This all serves to focus attention on what needs to be done to counteract low pay.

What needs to be done?

The NIESR report argued that the recent rapid fall in unemployment should generate real wage rises in the second half of 2014.

But for a sustained wage recovery productivity must be improved. They point out that wages have historically tended to track productivity growth in a “mutually reinforcing relationship”, but low wages have created incentives for firms to meet demand by hiring more workers, rather than through investment. The returns from productivity growth should be channelled back to ordinary workers.

To help break this cycle, a higher and better enforced National Minimum Wage is needed; at £6.50 (the current rate for those aged 21 and over) it is generally too low.

The TUC argues that employers in sectors that can afford it should pay more, and the Living Wage (until November, £7.65, or £8.80 in London) should be applied more widely.

But there’s a further challenge to official complacency over low pay, which is that far too many people in work are forced to rely on government benefits (which are being cut).

The GMB general union says that with 2.6 million workers earning either the minimum wage or no more than 50p above it, many are “trapped in a cycle of low pay subsidised by benefits”.

It points out that that the minimum a single person needs to live on without the need for state benefits is much higher than the Living Wage.

Current calculations for the Living Wage take into account in-work benefit rates, but unions need to be arguing for a rate of pay that provides enough to live on “without the need for extra state support”, the GMB says.

It has therefore set its sights on a £10 per hour “living wage” and enough hours to earn a decent living (campaigning for an eight-hour day but also getting exclusivity clauses that restrict workers on “zero hours contracts” outlawed, and insisting that all contracts should have a set minimum number of working hours).

Alongside this, it also wants rent controls; free childcare; closing Corporation Tax loopholes; and a new right of “access all areas”.

The latter is a policy adopted at the TUC Congress in 2013 that would allow people to call a union into their workplace to advise them on their rights and help them organise, whether there is recognition or not. This could be part of a wider battle to rebuild collective bargaining as the main way wages are settled in UK workplaces.