DESPITE headwinds from the continent, Britain’s economy continues to do pretty well. GDP has exceeded forecasts so far this year, and in the second quarter was 3.1% larger than a year ago. The economy has at last surpassed its pre-crisis peak. Yet working Britons are not feeling the benefit. Real wages have fallen for seven consecutive years, and are 6.9% below their 2007 level. Britain is experiencing its longest period of pay stagnation since records began in 1855 (see chart).
On October 18th, 90,000 workers took to London’s streets to join a protest organised by the Trades Union Congress (TUC). Participants bemoaned not just pay stagnation, but also inequality: FTSE 100 chief executives now typically earn 120 times as much as their average employee, up from 47 times as much in 2000, according to Incomes Data Services, a research company. On October 20th the Social Mobility and Child Poverty Commission, headed by Alan Milburn, a former Labour minister, claimed radical changes are necessary to prevent Britain becoming “permanently divided”.
As well as pay rises for workers, the TUC wants more companies to pay the living wage—£7.65 ($12.30) an hour, or £8.80 in London—to their lowest earners, and a crackdown on “excessive” executive pay. Mr Milburn would exempt the working poor, who often have their wages topped up by the state, from further public-spending cuts. That will be difficult. State pensions, which make up two-thirds of the welfare budget, have already been protected from austerity.
Low pay reflects Britain’s dismal record since the recession when it comes to productivity: output per hour worked remains 2.2% below its pre-crisis peak and 16% below its pre-crisis trend. The recession caused less unemployment than elsewhere, but real wages fell instead as productivity tanked. That is fortunate in some ways, as unemployment has acute and concentrated costs. But those in work are now badly in need of some respite.
Possible explanations abound for the curious trend. Britain has more liberal labour markets than most European countries, which may have meant companies found wages easier to cut, keeping employment high. Some sectors, such as financial services, may have mismeasured productivity before the crisis. And low investment probably contributed too.
There is hope in some quarters that low inflation—which fell to 1.2% in September—will ease the pressure on budgets. To the extent that small price rises represent external factors, such as cheaper commodities, workers benefit. However, below-target inflation partly reflects weak demand, which also holds down wages. And if inflation expectations fall, the real interest rate—the cost of credit accounting for inflation—rises. That squeezes borrowers and holds back demand further. Fortunately, British inflation expectations tend to be well-anchored near the Bank of England’s target; they did not shift much during the high inflation of 2011, for example.
One mooted explanation for low wages is particularly controversial. UKIP, Britain’s insurgent anti-EU party, claims that immigration from Europe is holding down pay. Evidence on this is mixed: conflicting studies have separately found both a small increase and a small reduction in average wages as a result of migration. But there is better evidence that its effects are unequal; the lowest-paid workers, who face the fiercest competition from migrants, find their wages held down by the arrival of foreign workers. Higher earners are more likely to benefit. Division, it seems, is rife. With an election around the corner, politicians are sure to take notice.
This article appeared in the Britain section of the print edition under the headline "What recovery?"
