Unprecedented wage fall could explain lower unemployment levels, says IFS

Real wages have fallen by more than in any comparable five year period and may in part explain why unemployment levels have not dropped drastically in the recession while productivity has dropped to an unprecedented degree, according to analysis by the Institute for Fiscal Studies.

The analysis shows employment has dropped by much less than in previous recessions, but that inequality has fallen – in sharp contrast to the 1980s recession and its aftermath. It also shows older workers and consumers have been much less affected than younger generations.

The analysis shows productivity has fallen within firms, especially amongst small firms and those whose output has fallen. For example, firms with fewer than 50 employees have seen their productivity fall 7% relative to a pre-recession trend, compared to no change for firms with more than 250 employees. Larger firms have tended to lay off workers while smaller firms have tended to reduce wages, it says. Investment has also fallen further in small firms than in larger ones, which could also explain why productivity has fallen more in small firms than in larger ones.

The IFS says the fall in productivity has been accompanied by unprecedented falls in nominal and real hourly wages in the UK, which have occurred even amongst workers staying in the same job: one third of such workers saw their wages cut or frozen in nominal terms between 2010 and 2011.

It says the fall in wages is in part explained by greater labour supply and greater competition for jobs plus a willingness to accept lower wagers. Changes in the benefits system mean lone parents and older workers, for example, are not withdrawing from the labour market as they have in previous recessions. In addition, fewer workers are unionised or covered by collective wage agreements now than in the past, says the IFS. Its analysis shows wage growth since 2008 has tended to be lower amongst workers who were not covered by such agreements, and they were more likely to experience nominal wage freezes in 2011.

Claire Crawford, Programme Director at IFS and Managing Editor of Fiscal Studies, said: “The falls in nominal wages that workers have experienced during this recession are unprecedented, and seem to provide at least a partial explanation for why unemployment has risen less – and productivity has fallen more – than might otherwise have been expected. To the extent that it is better for individuals to stay in work, albeit with lower wages, than to become unemployed, the long-term consequences of this recession in terms of labour market performance may be less severe than following the high unemployment recessions of the 1980s and 1990s.”

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