High inflation and low earnings growth means growing livelihood gap
We all know that prices are rising fast, with CPI now at 4 per cent and RPI just over 5. With today’s data showing us that in December wage growth held steady at 2.3 per cent (regular pay) it’s self-evident that wages are being outstripped by inflation. A few weeks ago Mervyn King spelt the problem out: according to the Bank of England’s forecasts by the end of 2011 real wages (the actual value of wages once inflation has been taken into account) will be worth the same as 2005.
The following chart shows the scale of this change. For most of the last decade wages increased faster than RPI, or at a relatively similar speed. After a short period during the downturn when earnings rose more quickly than inflation over the last year RPI’s rise has been, on average, 2.7 percentage points faster than annual wage growth.
ONS’s measure of Average Weekly Earnings (regular pay) also allows us to see what this means in terms of working people’s pay cheques. Average weekly pay in January 2008 (the start of the recession) was £404 a week, or £21,008 a year before tax. The average annual rate of wage growth throughout the preceding year was 4.1 per cent, and if wages had continued to grow at this rate average pay would be around £439 a week (or £22,828 a year). But instead wage growth has been muted, held down by high unemployment, weak demand and a high degree of uncertainty about the country’s economic prospects. Average Weekly Earnings across the economy are therefore £430 a week – an average of some £468 a year less than would have been the case if pre-recession trends in wage growth had continued.
The relative value of wages is falling as wage growth is slower than pre-recession rates – household incomes are being squeezed. And if you consider the impacts that spending cuts (for example tax credit payments for working families or additional transport costs as Government subsidies end) and tax rises (including VAT and National Insurance) will continue to have during 2011 the picture gets even worse. Unemployment has been close to 2.5 million for over a year and over the same period those who have kept their jobs have seen their living standards fall. Today’s figures show employment levels falling and wage growth falling further behind prices: the UK’s livelihood gap is getting worse.