Weak wage growth poses questions over stability of recovery

The first full year when average wages are expected to recover to pre-recession levels was pushed back from 2017 to 2018 today by the government’s official economic forecasts, despite strong and very welcome growth in employment. As a result, the Resolution Foundation calculates that the median wage – the pay of a typical worker – will still be well below pre-recession levels in 2018, and no higher than it was in 2003. This means many UK households are likely to have experienced 15 “lost years” on pay.

These forecasts, which use the CPI measure of inflation, would look substantially worse under RPI. Using RPI, median wages continue to fall in real terms through to 2018.

The weakness of wage growth and the corresponding uncertainty over growth in productivity could slow the pace of recovery. A fall in the savings ratio – also noted by the OBR – is a further concern for the stability of recovery as consumption which runs down savings can provide only a temporary basis for growth.

Key points

· The OBR forecasts that 2018 will be the first full year in which average wages regain the levels seen before the great recession until 2018. In March it predicted this would happen in 2017. In June 2010 the projection was for this to happen in 2013

· Resolution Foundation analysis shows the weekly wage of the typical (median) worker is likely to be £430 in 2018 – back to where it was in 2003 (£429) and 5.3 per cent lower than its pre-recession level in 2008 (£454). This is calculated at today’s prices using the CPI measure of inflation. If the RPI measure is used the median wage shows little sign of recovering – £401 in 2018 compared to £453 in 2008 and a peak of £462 in 2004.

· If past trends are repeated, median male earnings are forecast to reach £520 in 2018 – a fall of 8 per cent compared to 2008 (using CPI). For women, the expectation is that wages will reach £348 in 2018 – a fall of 0.5 per cent over the same period.

· If wage growth over the next few years follows the pattern observed during previous phases of economic growth, the Resolution Foundation analysis suggest that the median wage among 22-29 year olds would fall by 10 per cent between 2008 and 2018 – from £423 to £380.

· Today’s figures show that the OBR now expects a recovery with less strong wage growth than it had anticipated in forecasts from the last two years. While it now expects GDP to grow by 14.8 per cent between 2012 and 2018, it suggests wages will grow by just 7.5 per cent. GDP would therefore outpace wages by a ratio of 2:1 – compared to the 1.7:1 which was anticipated back in March. This is also higher than the ratios recorded during the economic growth years of 1996-2001 (1.2:1) and 2001-2007 (1.8:1).

· The savings to income ratio is now projected to fall from 5.7 per cent in 2013 to 4.3 per cent by 2018. In March the OBR projected that it would stand at 7 per cent this year, falling to 5 per cent in 2017

Matthew Whittaker, senior economist at the Resolution Foundation, said: “ The much delayed recovery in earnings is being delayed still further. Although average wages are forecast to outpace inflation for the first time in six years in 2014, there’s a lot of ground to make up. For typical workers, pre-recession pay levels are unlikely to return before the end of the decade.

While employment is forecast to continue rising, the lack of productivity growth raises questions over the sustainability of the recovery. In the absence of a return to wage increases, consumption growth – which is driving the recovery at the moment – is likely to falter, seriously undermining the scope for robust growth. This underlines why a balanced recovery is so important – only with steady and sustainable wage growth can we expect the benefits of rising GDP to be widely shared and to repair living standards.”

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