Real wages falling, pay inequality growing
Governments love to tell us “work is the best route out of poverty” but that message is going to get harder to sell as real wages fall. New figures for real wages (looking at the value of workers’ pay after allowing for inflation) are headlined
Real wages up 62% on average over the past 25 years
and that is true, but only for the period before the global recession hit. Comparing wages in 2007 and 2011 (with the 2007 wages increased in line with 2011 prices), the median wage fell from £12.97 an hour to £12.62. For someone working a 35 hour week that is £12.25 – £637 a year.
As a proportion of their earnings, the losses have been worst for workers at the bottom of the income distribution. The chart below shows the fall in real wages as a percentage of workers’ 2007 wages, with workers arranged in percentiles (hundredths) from left to right:
Workers in the bottom two per cent have fared less badly (probably because of the minimum wage) but the workers losing 3.5 per cent or more are concentrated in the bottom third of the distribution.
I have argued before that getting people into work is not an adequate anti-poverty strategy by itself. The jobs open to people moving off Jobseeker’s Allowance and Employment and Support Allowance will mainly be in the bottom third, so it’s a strategy that’s been getting weaker for five years.
A second point to emerge from today’s figures is that the labour market may be part of the solution, but it’s also part of the problem: even over a longer period, earnings inequality has been growing.
Between 1986 and 2011, median earnings increased 62 per cent in real terms, but this average hides a huge range of increases across the income scale. Every percentile on median earnings or higher saw a real-terms increase of 62 per cent or more. Except for the very bottom percentile, every percentile below median earnings saw an increase of less than 62 per cent. (Again, the position of bottom percentile probably reflects the impact of the minimum wage.)
A chart is probably the best way to show the disadvantage of low paid workers:
The impact of the minimum wage is even clearer if we look at the ratio of the real wages of the highest paid workers to the lowest paid:
Between 1986 and 2011, the ratio of the wages of the highest paid percentile to those of the lowest paid rose from 8.1:1 to 10.3: 1. If we want to look at figures where the minimum wage has less influence, we can look at the position of workers in the 90th, 50th and 10th percentiles:
This picture of earnings inequality growing at every point of the distribution, like a stretched rubber band is reinforced when we consider that the ratio of earnings in the 90th percentile to earnings in the 80th grew by 2.8 per cent and the 20th/10th ratio by 2.3 per cent.
Inequality and poverty aren’t the same thing, but they are intimately connected. We cannot rely on the labour market to provide a stable ladder out of poverty when it is one of the forces driving inequality.