Stagnant growth and high inflation crippling take home pay

Allister Heath
IF you have lots of debt, own a home in London with a mortgage, are employed and hope that your wages will rise, you may be one of the great winners of our age. If you are self-employed, work in the private sector, have lots of savings and have limited control over your income, you are fast becoming one of the losers.

That, in a nutshell, are the conclusions to be drawn from devastating data showing the extent and distribution of falling real wages in the UK – and the Bank of England’s dramatic, semi-explicit admission that inflation is now being allowed to rip. Prices will continue to rise above the target, with the Bank blaming all sorts of factors apart from themselves. That suits some borrowers just fine but is a disaster for many, who wrongly trusted the authorities to protect the pound.

Real median wages are now slightly lower than they were in 2003. Average private sector wages have been falling since 2009; they peaked in 2008 but gains seen in previous years have been undone. Male full-time employees resident in London earned £15.54 per hour in 2012, compared with £16.14 in real terms in 2002 – a drop of 4 per cent.

Public sector workers have done best. Their incomes started to fall well after those of their private sector counterparts; the drops, when they happened, were smaller. Between 2010-2012, the decline in median real earnings averaged 2.1 per cent per year for full-time male public sector workers (and rose in cash terms, despite the supposed pay freeze) compared with a drop of 3.1 per cent per year for their private sector counterparts. Yet again, austerity has been much harsher in the private sector than in the public sector.

Astonishingly, median self-employed income has collapsed by 25 per cent in real terms from peak – and by an almost incredible 33.8 per cent in London. So why are the self-employed doing so badly? Their income fluctuates much more with the economic cycle; freelance contracts are short-term and can easily be renegotiated up or down very quickly. Their number is up by 367,000 since 2008; far more Brits are working for themselves, an excellent development as it increases the flexibility in the labour market and makes people freer and more responsible for their own lives. The increase in numbers (of around 10 per cent) is one reason for the decline in median incomes; new entrants probably earn less because they lost their jobs, couldn’t (or didn’t want to) find an alternative position but found that they could still earn something by going freelance.

Another reason is the collapse in the construction industries. Many other freelance intensive industries – such as personal trainers – are very dependent on the earnings of their clients; if these fall, the impact on the self-employed is disproportionate. Self-employed people who work for big firms are the easiest buffer: when demand falls, their hours get chopped before staff get fired (a bit like overtime getting axed); when demand rises, their hours rise before staff get hired. A final reason may be measurement error: income is hard to quantify in the freelance sector.

Unless you are lucky, very skilled and in an industry where productivity is increasing (or a firm that is bucking the trend), brace for years of misery and declining living standards. Deals are back in the City – with yesterday’s mulled bid by Vodafone for Kabel Deutschland just the latest – but the financial sector’s partial recovery should not be misinterpreted for an overall economic rebound. For most people, especially outside of London and its commuter belt, the grim reality of declining real wages won’t go away any time soon.
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