Londoners and the under 40s have experienced the biggest pay falls as the wage squeeze returns

Typical hourly pay for workers living in London, Northern Ireland and those under the age of 40 were still at least 11 per cent below pre-crisis levels as the pay squeeze returned at the start of the year, according to the Resolution Foundation’s latest Earnings Outlook published today (Sunday).

With real average weekly earnings falling by 0.4 per cent in the first three months in 2017, the Outlook – which is supported by the Nuffield Foundation – examines the state of pay on the eve of the returning wage squeeze.

It finds that part-time pay is the only area where typical hourly pay had returned to its pre-crisis peak by the first quarter of 2017. Female pay was still 2 per cent below peak, while male pay trailed by 6 per cent.

Londoners were furthest from pre-crisis pay levels (at 12 per cent below peak), closely followed by Northern Ireland (-11 per cent). Real hourly pay for workers aged 22-39 was down 11 per cent on its peak, compared to -5 per cent for workers in their 50s and -2 per cent for workers in their 60s.

The Foundation says that the current pay squeeze is expected to be shallower and shorter than the unprecedented fall that followed the financial crisis. However, the fact it has returned before pay packets have recovered from the last squeeze will make it all the more painful for households.

The Earnings Outlook also looks at the one big bright spot in an otherwise bleak picture on pay – the impact of the National Living Wage (NLW). The new wage floor has increased by 12 per cent since its introduction two years ago and benefitted millions of workers in the process.

The NLW may have also reduced incentives to move jobs at the bottom end of the labour market, because the relative returns to moving jobs have declined.

The Outlook shows that prior to the NLW, for someone near the bottom of the pay distribution (earning more than just 10 per cent of the population) the annual pay increase associated with moving jobs was 21 per cent, compared to just 3 per cent for staying with a firm. The ‘mover premium’ was therefore almost seven times as large as the typical ‘staying put’ pay rise.

Since the introduction of the NLW in 2016 however, the ‘staying put’ pay rise for such workers has jumped from 3 to 10 per cent. While it still pays not to stay (the ‘mover’ premium has also increased to 25 per cent) the relative returns to moving job have declined to just 2.3. The Foundation says that this may put some people off the gamble of moving jobs.

The Foundation says that with around one in seven workers expected to be on the wage floor by 2020, progression to get people up the pay scale and out of low pay altogether is a major labour market challenge that firms and policy makers need to focus on.

It adds that greater job mobility is not just good for the living standards for individuals, it benefits employers and the wider economy by enabling people to boost their skills and match them with the right job.

Stephen Clarke, Economic Analyst at the Resolution Foundation, said:

“The pay squeeze made an unwelcome return at the start of 2017 and looks set to stay with us for the rest of the year at least. What’s most worrying is that people’s pay packets still haven’t recovered from the last squeeze when this latest bout of falling pay hit.

“The wages of younger workers and those living in London are still more than 10 per cent lower than they were back in 2008, and this latest squeeze means it will take many more years for their earnings to fully recover.

“The National Living Wage has been a bright spot amidst this bleak picture on pay, delivering a 12 per cent rise over the last two years. It may also be shifting people’s thinking about moving jobs, given the huge pay rises associated with staying in the same low-paid job. This attitude is understandable given that moving jobs is always a gamble, but it’s bad for people’s careers and chances of escaping low pay in the long run.

“The welcome introduction of the National Living Wage means that dealing with our growing labour market challenge of getting people to progress out of low pay is more important than ever.”