Welcome to the New Normal: Pay can go down as well as up

Allister Heath
WE in the West are not used to getting poorer. Ever since the industrial revolution put to an end to millennia of stagnation, and barring catastrophes such as world wars, or short recessions, a belief in perpetual progress and ever rising incomes has become a defining characteristic of the psyche of all developed nations.

Yet most people in work in Britain and America have seen their salaries drop for several years now. The figures for the US are especially stark. The Census Bureau calculates that real median household income is now 8.1 per cent lower than in 2007, the year before the recession started, and 8.9 per cent lower than the median household income peak that occurred in 1999. These figures are so bad as to be hard to believe: real median US household income is down to levels last seen in the early 1990s - and in fact were originally reached, if only briefly, in the late 1980s, at the end of Ronald Reagan's presidency. There has been no growth for 25 years, a truly shocking finding.

Needless to say, these statistics should be taken with a pinch of salt. For all the advanced techniques that have gone into working them out, and adjusting for improved product quality as well as inflation, the median American today has access to goods and services that he or she couldn't even dream of a few decades ago. Medical science has progressed in leaps and bounds; and 25 years ago the internet didn't exist and neither did mobile phones. There has also been a rise in the number of low-income workers, pushing down the median. That is why some economists believe the figures to be misleading, and that most Americans are actually better off. But regardless of who is right about living standards, nobody denies that the actual wages of millions of Americans have been under terrible downwards pressure.

Britain used to think it had escaped this problem, which could eventually be seen as the most important facing the West. But Michael Saunders, Citigroup's chief European economist, has compiled and analysed the statistics for the UK and his findings are equally grim. The Office for National Statistics puts average total pay growth at just 1.5 per cent over the past year- but median weekly earnings have not risen at all since the fourth quarter of 2010. In real terms, average earnings are down a staggering eight per cent from their peak while real median earnings are down by seven per cent - and that is even before direct tax hikes are accounted for.

This is terrible news for those affected - but it also implies that labour has become relatively cheaper, which helps to explain why private sector jobs have been created in the past two years. Labour costs, using the Eurostat measure, including non-wage costs, rose just 0.6 per cent year on year in the second quarter, down from 1.2 per cent at the start of the year, compared with a rise of two per cent for the Eurozone. Saunders calculates that UK labour cost growth averaged 4.8 per cent per year over 2000-07 and 2.4 per cent per year during 2008-11, versus 2.9 per cent and 2.6 per cent respectively for the Eurozone.

British labour costs - which had risen even faster than those in the Eurozone - are finally readjusting to the reality of a smaller economy and intense global competition. Eventually, real terms wage falls will stop. But it remains an open question whether the UK economy will be able to deliver decent real wage growth for the vast majority of its workers once again - or whether we will fall into the US trap, with millions facing permanent stagnation at best. Forget about all the trivia: that is the political question of the next decade.

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