Lowest paid face biggest decline in living standards since 1850s

You work for 16 hours, and what do you get? Dominic Lipinski/PA Wire

The labour market has shown some signs of recovery in the past year and the unemployment rate has fallen to 7.6%. While this appears to be a positive sign the reality is that many people with jobs are increasingly struggling to make ends meet.

A University of Birmingham report has highlighted the fact that, in 2012, the real value of workers’ wages fell back to 2003 levels, following several years of pay freezes and economic restructuring. And research by the New Economics Foundation (NEF) found that, in the past three years, workers on low and middle incomes have experienced the biggest decline in their living standards since reliable records began in the mid-nineteenth century.

For the average worker, wages have fallen by £1,300 every year since 2010. And at least one in five workers now earns less than a living wage – £13,600 or less for someone working full-time.

All of this means that, for the first time on record, more than half of those in poverty in the UK are living in a family with at least one person in a paid job, according to a Joseph Rowntree Foundation (JRF) report. A total of 13 million people in the UK were in poverty in 2011/12, with 6.5 million of those living in working families. The JRF report also shows that 4.6 million people were paid below a living wage in 2011, rising to 4.9 million in 2012. So (some) more people may be working but their pay is not keeping pace with inflation or helping many to avoid poverty.

And in recent years there has been a growth in “underemployment”, including people working on zero hours contracts (these increased by 50,000 between 2011 and 2012 while the average number of hours worked on such contracts fell). Wage freezes and cuts, a time when living costs have risen, are also part of the picture.

Long-term trends

The more fundamental root of the problem lies not in the current recession but in more significant long-term shifts since the 1970s. These shifts include changes in the nature of the labour market, with a decline in skilled manual work and growing wage inequality between workers in unskilled jobs and those workers who can command an increased “skills premium” in particular sectors.

Indeed, pay at the top has increased astronomically over the last few decades and these trends have continued in the last few years. For example, the period 2002 to 2011 saw average pay packages for CEOs in FTSE100 organisations soaring from £2.6 million to £4.8 million (with the top ten executives receiving between £7.9 and £20.9 million in 2011). And data from European Banking Authority found that the number of UK bankers earning more than €1m rose from 2,436 in 2011 to 2,714 in 2012 and their average total pay, including fixed salaries and bonuses rose from €1.4m in 2011 to €2m in 2012. These highest earners received bonuses averaging 3.7 times their base salary, a practice that the European Union is planning to reform with their proposal to cap variable pay to 100% of salary.

At the same time as pay has become much more unequal, the proportion of national wealth (GDP) going to wages has also fallen (from 65% in 1970 to 60% in 2007) as more of the national wealth goes to share holders rather than workers. So workers on average, and below average, wages are receiving a smaller share of a smaller pot. Reforms in the 1980s also weakened the ability of trade unions to campaign against these trends and union membership is now half what it was in the 1970s. According to the Office for National Statistics, around 6.5 million employees in the UK were trade union members in 2012, well below the peak of over 13 million in 1979.

The main response to low pay from successive governments since the 1980s has been to try to “"ake work pay” by introducing a minimum wage and providing income top-ups to low-paid workers through the tax credit/benefit system. But the minimum wage is below the level of a living wage and Universal Credit is beset by major technical, implementation and design problems. More importantly, Universal Credit does nothing to tackle the root of the problem in the labour market and, indeed, merely serves to support employers who pay low wages.

Until we address the root causes of low pay, reforms such as Universal Credit will, at very best, merely ameliorate the problem and, at worst, serve to perpetuate it.