United Kingdom: Long-term growth in real earnings halted by recession

A wage trend analysis shows that UK employees starting work in the 1990s were, in real terms, 40% better paid by the age of 39 than those whose working lives began in the 1970s. The gender pay gap shrank after 1975 for the under-30s, while the introduction of the national minimum wage in 1998 boosted wage growth in lower-paid jobs.  

On 3 July 2014, the Office for National Statistics (ONS) published an analysis of longitudinal data on UK wages (521 KB PDF) over the past four decades. This article summarises its key findings.

Background/methodology

The ONS is the UK's national statistical institute and is responsible for producing a wide range of official statistics on economic and social issues, including the operation of the labour market. It is a government body but is independent of ministers. It reports through the UK Statistics Authority to parliament and the devolved administrations of Scotland, Wales and Northern Ireland.

The ONS report draws on data from the New Earnings Survey (NES) and from the Annual Survey of Hours and Earnings (ASHE), which replaced the NES in 2004. Earnings data since 1975 were adjusted to a 2013 equivalent using the Consumer Prices Index (CPI) measure of inflation. The report uses distributional and cohort analysis to examine a range of different aspects of wage trends, including:

  • the earnings progression of employee cohorts aged 21 in 1975, 1985 and 1995;
  • real earnings since 1975;
  • the effects of the economic downturn on real earnings;
  • changes in the extent and pattern of the gender pay gap;
  • the impact of the introduction of the national minimum wage in 1998;
  • regional comparisons.

Key findings

Earnings progression

The report compares the inflation-adjusted earnings of three cohorts of workers – those aged 21 in 1975, 1985 and 1995 respectively – over the period 1975 to 2013, by which time the workers in the 1995 cohort were aged 39. The headline finding is that people who started their career in 1995 earned on average 40% more in real terms up to the age of 39 than the equivalent age group who started work in 1975. A similar comparison of the age range 21 to 49 shows that those who started work in 1985 earned 18% more than their 1975 counterparts.

In 2013 prices, the average hourly earnings of 21 year olds were GBP 5.49 in 1975 (€7.02 as at 7 January 2015), GBP 5.93 (€7.58) in 1985 and GBP 6.57 (€8.39) in 1995. For each cohort average hourly wages rose as individuals got older and progressed in their careers. The report shows that the earnings of the 1975 cohort had risen by 100% by the time they reached the age of 59 in 2013, equivalent to an above-inflation wage rise of 1.9% per year over their career. Real earnings grew by 107% (2.6% per year) for those who started work in 1985 up to the age of 49 in 2013 while real earnings grew by 94% (3.7% per year) for those who started work in 1995 up to the age of 39 in 2013.

Since 2009 all three cohorts have seen a fall in their real earnings, with inflation as measured by the CPI being above wage growth. Average wages for those who started work in 1995 fell by 10% to GBP 12.72 (€16.26) per hour from a peak of GBP 14.11 (€18.03) per hour in 2009. For the 1975 cohort, wages fell by 12% to GBP 11.03 (€14.09) per hour in 2013, from a peak of GBP 12.54 (€16.02) per hour in 2009. The report states:

Some of the decline for the 1975 cohort may be explained by people in their late fifties beginning to consider retirement, with the highest earners often retiring early. This would bring down average pay before any consideration is taken of the wider economic conditions.

Real earnings growth

Between 1975 and 2013 real earnings for the average full-time employee grew by 101%. Earnings growth was higher for the bottom 1% of earners at 143%, but the highest rate of growth was for the top 1% of earners where real wages grew by 189%. There was a broadly similar growth pattern for part-time workers. Rising productivity over the same period helps explain the increase in real earnings since 1975.

Effects of the economic downturn

For full-time employees, real earnings fell between 2009 and 2013 at all points across the distribution of earnings. On average, a full-time worker’s wages were 7.5% lower in 2013 compared with 2009. The report points out that, in the period between 2009 and 2011, the largest falls in earnings were experienced by the bottom 10% of earners whereas between 2011 and 2013 the largest falls in real earnings occurred among the top 10% of earners.

Gender pay gap

The report shows that in 1975 there was a marked difference in pay levels between men and women across the age range, except for 16 and 17 year olds who were paid similar wages. The gender pay gap that year was the widest for those aged 38. Men aged 38 were paid on average 61% more than women of the same age. In 2013, men and women earned comparable wages up until their early 30s. But from their mid-30s men began to out-earn women of the same age, with the difference peaking at 45% for 49 year olds.

The report suggests that changes in employment legislation and in the economy may account for the fall in the gender pay gap, but that a ‘cohort effect’ may explain why the improvement has been confined to younger age groups:

Over time changes to the economy and to legislation have fed through to new entrants to the labour market more than existing members of the labour market. If this is the case we would expect to see differences in gender pay decrease at older ages as time progresses.

Impact of national minimum wage

The report shows that since the introduction of the national minimum wage (NMW), wage growth at the bottom of the earnings distribution has been strong for both full-time and part-time employees. Between 1975 and the introduction of the NMW in 1998, real earnings growth for the bottom 1% of full-timers was 63%, while the top 1% of earners saw growth of 138%, more than twice as much. However, between 1998 and 2013, the bottom 1% of earners saw growth of 49%, compared with 21% for the top 1%. Even stronger earnings growth was evident for part-time employees but from a lower starting point: full-time employees still out-earned their part-time counterparts at all points across the earnings distribution in 2013.

Regional comparisons

In 2013, almost one-third (32.6%) of the top 10% of earners worked in London. For the lowest-paid earners the spread was more even, but the largest percentage of the bottom 10% of earners (12.3%) worked in the North West.

The report also finds that wage inequality, as measured by the ratio of the top 1% of earners to the bottom 1% of earners, has fallen since the introduction of the NMW. In 2013, across the UK as a whole, the highest-paid employees earned 11 times more than the lowest paid, down from 12.7 times in 1998. Wage inequality has also fallen across all regions of England and the devolved countries of the UK since 1998. In 2013, inequality was highest in London, with a ratio of 14.8, and lowest in Wales with a ratio of 8.

Commentary

As well as demonstrating the long-term historical growth in real earnings, the report highlights key issues of contemporary concern for the social partners, including falling real wages since 2009 and the persistence of gender and regional wage inequality.

Most notably, the leadership of the employers’ organisation, the Confederation of British Industry (CBI), has publicly stressed the importance of translating economic recovery into wage growth for employees after the prolonged pay squeeze, while the Trades Union Congress (TUC) has consistently voiced its concern at falling living standards since the economic downturn and has called for ‘wage-led growth’. These concerns have also been reflected in both organisations’ support for increasing the NMW.

 

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