Catch-22 on wages has echoes of the financial crisis

It was around this time last year – mere weeks before Covid swept through the UK – that official figures showed average weekly wages had finally recovered ground lost after the financial crisis to surpass levels from March 2008. After nearly 12 years of economic turmoil and lethargic recovery, living standards for the average worker had edged higher, to the tune of 65p per week.

That meagre progress looks set for another prolonged period of subversion as lockdown restrictions to control the pandemic have put hundreds of thousands of people out of work. At the same time, many of those who have retained their jobs lack certainty that they will continue to be employed.

New research from XpertHR has found that the median pay rise in the private sector during the three months to January was just 1 per cent, half of what it was in the final three months of 2020. From a sample of 100 pay awards, four out of five received pay rises that were lower than the previous year, while pay freezes accounted for a third of settlements.

XpertHR blamed sluggish activity on employers’ concerns about both the pandemic and Brexit, but professor David Spencer of Leeds University Business School clearly laid the blame on labour market conditions: “A big factor holding back pay rises is the higher-level unemployment and, more generally, job insecurity.”

In times of economic uncertainty, workers tend to feel they have much less bargaining power when it comes to asking for more money. Employers, on the other hand, are unable or unwilling to offer higher wages while full recovery remains a distant prospect.

The problem with this corrosive cycle is that it hampers efforts to get the economy back to firing on all cylinders, with consumers afraid or unable to buy the goods and services that employers need to sell in order to boost profits – and hopefully pay packages as well.

The Chancellor could use Wednesday’s Budget to cancel the freeze on most public sector pay, raising the incomes of at least part of the workforce. However, with so many other competing interests – including the likely extension of furlough – this seems unlikely.

For now, we look caught in the catch-22 of wage erosion and its knock-on effects. Should the pattern of the recovery from the financial crisis be repeated, it will be 2033 before workers get back to earning the equivalent of what they were paid before the onset of Covid.

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Posted on March 2, 2021