Britain has a ‘bulging middle’ when it comes to pay

Britain’s earnings distribution is bulging in the middle, as the share of both low- and high-paid employees continues to decline, the Resolution Foundation said today (Wednesday) in response to the ONS Annual Survey of Hours and Earnings (ASHE).

The latest ASHE data – the most authoritative statistics on what is happening to pay packets across Britain – showed median employee weekly earnings grew sharply in the year to April 2023, by 7.7 per cent. However, with inflation hitting a 40-year high over this period, earnings continued to fall in real terms, by 1.2 per cent.

Over the course of the Covid and cost of living crises (2019 to 2023), real median weekly earnings have fallen fastest for men (-4.5 per cent), workers age 18-to-21 (-6.4 per cent), in London (-4.7 per cent) and the South East (-2.6 per cent), compared to an overall fall across all employees of -1.0 per cent.

Looking over the past year, weekly pay growth was strongest in low earning occupation groups like caring, leisure and other service occupations (up 9.4 per cent in nominal terms) and sales and customer services (up 9.2 per cent), thanks largely to a big rise in the National Living Wage (NLW). This trend is likely to continue into next year, says the Foundation, with the NLW set for another significant increase.

As well as a rising NLW reducing the share of low-paid workers across Britain (defined as earning less than two-thirds of typical hourly pay, which was £15.83 in 2023), another less noticed shift is taking place – the falling share of high-paid employees (defined as earning at least 50 per cent more than typical hourly pay). These two trends mean that the proportion of employees who are neither low- or high-paid has risen from 58 per cent in 2019 to 68 per cent in 2023.

The reason why the share of high-paid employees is falling is less well understood, but one likely driver is the fact that many high earning employees have shifted towards self-employment – in large part to reduce their tax bills.

Recent Resolution Foundation research found that marginal tax rates vary hugely across different employment statuses – peaking at 53.4 per cent when employer NICs are included or 54.5 per cent paid on income from dividends, but falling to 47 per cent paid on self-employment income, and as little as 0 per cent if you keep your income in a company and then emigrate.

The Foundation adds that while the share of low-paid workers is falling when measured by hourly pay, it is not falling as fast when measured on a weekly pay basis, highlighting the need to tackle low hours as well as low hourly pay rates.

Nye Cominetti, Senior Economist at the Resolution Foundation, said:

“Britain has a bulging middle as the share of both high- and low-paid employees continues to decline.

“This trend has been driven in large part by policy – with a rising minimum wage reducing the share low-paid employees, while more and more high-paid employees are moving into self-employment in order to reduce their tax bills.

“Policy makers rightly celebrate the role of the National Living Wage in reducing low pay. But we should question whether it’s right to offer already very high earners additional tax breaks – which aren’t available to most low and middle earners – simply by changing their employment status.”