Labour productivity must improve or wages will remain stagnant
Low levels of labour productivity in the past half decade have been the driving reason behind the decline in real wages in Britain, according to the Office for National Statistics.
The ONS identified that Britainís workers have had to endure a marked decrease in the actual value of their take-home pay in the last four years, and has meant that the period between 2009 and 2013 saw the greatest drop in wages for half a century.
The ONS argued that the initial period of the recession between 2008 and 2009 saw wages drop for a variety of reasons ranging from less working hours, employment changes from workers to lower paid jobs and a rise in compulsory national insurance contributions.
However, since then, these have not significantly impacted the complexion of wages, and it the consistent low levels of labour productivity in the UK that are inhibiting it from climbing back to pre-recession levels.
ìSome of these factors do not appear to explain the continuing reduction in real earnings since 2010, which may therefore be driven by the continuing weakness in productivity,î the ONS said in an analysis.
Previous ONS data displayed that actual wages increased by 2.9% in the 1970ís and 1980ís, and 1.5% and 1.2% in the 1990ís and 2000ís. However, during the current decade, this figure has slumped to -2.2%, meaning that wages have now decreased at a rate that has not been seen for over 50 years in the UK.
This is despite a massive upturn in the countryís economic performance in recent times, which in the past was a pre-cursor to rising wages. Britainís economy grew by a staggering 1.9% last year, making it one of the fastest growing economies in the western world. Furthermore, unemployment fell rapidly over the course of last year, with the current 7.1% exceedingly low when compared to some of Britainís counterparts.
However, living standards have continued to fall, with rising housing, energy and food costs at a rate faster than inflation, significantly increasing the financial burden on low income families across the UK.
The ONS have argued that unlike past recessions, productivity has increased at a vastly slower rate, which is why employment has improved but actual wages have decreased at the same time.
This is because business heads have sought to employ extra workers in a bid to improve employment in the country, rather than encouraging their current staff to be more efficient or investing in technology that would make the overall performance of their productivity more efficient. Indeed, the average number of output hours actually rose in the final quarter of last year by 1.1%, compounding the notion that labour productivity is inhibiting the natural progression of wage rises occurring following growth improvement.
And this explains why the Bank of England have now stopped linking their policy for interest rates to employment, as a decrease in employment no longer reflects an improvement in the financial standing of workers across the UK.
The reality now is that if the Bank wants to choose the right time to raise interest rates, that they will have to link them to the trajectory of actual wages, as this the factor which is important when it comes to living standards.
Frances OíGrady, general secretary of the Trades Union Congress, argued that British workers had been faced with an unheard of level of wage squeezes in the past four years, and called for reforms to be made with economic policy in order to help the countryís lowest earners cope with the increasingly difficult financial climate they find themselves in.
ìEven more worryingly, average pay rises have got weaker in every decade since the 1980s, despite increases in productivity, growth and profits. Unless things change, the 2010s could be the first ever decade of falling wages,î she added.
ìA return to business as usual may only bring modest pay growth. We need radical economic reform to give hard-working people the pay rises they deserve.î