The term ‘feeling the pinch’ has certainly been bandied about a lot over the last five years as the economic downturn has put a stranglehold on Blighty’s businesses and their workers. However, a new piece of analysis published today by the Institute of Fiscal Studies (IFS) offers a somewhat worrying picture of how the recession has hit the pay packets of the average employee. Moreover though, they also serve to highlight the UK’s so-called ‘productivity puzzle’, with employment having fallen at a lower rate than output, and indeed at a lower rate than in previous recessions. This certainly demands a bit of explanation.
First of all, taking a look at the key findings of the IFS’ analysis, we discover the following:
- Productivity has fallen within firms, especially amongst small firms and those whose output has fallen. For example, firms with fewer than 50 employees have seen their productivity fall 7% relative to a pre-recession trend, compared to no change for firms with more than 250 employees.
- Larger firms have tended to lay off workers while smaller firms have tended to reduce wages. Investment has also fallen further in small firms than in larger ones, which the IFS believes may help to explain why productivity has fallen more in small firms than in larger ones.
- The fall in productivity has been accompanied by unprecedented falls in nominal and real hourly wages in the UK, which have occurred even amongst workers staying in the same job. And here’s the kicker: one third of such workers saw their wages cut or frozen in nominal terms between 2010 and 2011.
This obviously begs the question of why wages have fallen at such a level, especially when the unemployment rate hasn’t been as dire as in years gone by, and inequality has also fallen compared to the 1980s. The IFS suggests that the stark drop in wages is driven in part by greater labour supply. It stresses, for example, that lone parents and older workers are not withdrawing from the labour market as they have in previous recessions, which it claims may to some degree be driven by changes to the welfare system. This means that workers may be experiencing greater competition for jobs and hence may be more willing to accept lower wages than before. In addition, the IFS found that fewer workers are unionised or covered by collective wage agreements now than in the past. It reveals that wage growth since 2008 has tended to be lower amongst workers who were not covered by such agreements, and they were more likely to experience nominal wage freezes in 2011.
Commenting on the findings, Claire Crawford, programme director at 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.”
She added: “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.”
Take this how you will, but positives appear pretty limited here, especially considering the proportion of the working population that has had to deal with lighter wallet. Indeed, the Trades Union Congress revealed yesterday that the UK’s overall pay packet was £52bn smaller last year compared to on the eve of the recession in 2007. Now if that doesn’t make for grim reading, we don’t know what does. 
