MercoPress. South Atlantic News Agency

Wages in the UK have fallen dramatically since the recession, helping to keep jobs

Why unemployment has not been higher: economists call it the ‘productivity puzzle’

Wages in the United Kingdom have fallen more in real terms during the current economic downturn than ever before, according to a report. One third of workers who stayed in the same job saw a wage cut or freeze between 2010 and 2011, said the Institute for Fiscal Studies (IFS).

“The falls in nominal wages... during this recession are unprecedented,” said Claire Crawford from the IFS. This may explain why unemployment has not been higher, she added.

Economists have puzzled over the fact that, since the recession began in 2008, the UK has seen the longest and deepest loss of output in a century - and yet employment has dropped by much less than in previous recessions. The conundrum is known as the “productivity puzzle”.

“Lone parents and older workers, for example, are not withdrawing from the labour market as they have in previous recessions, which may in part be driven by changes to the welfare system, ” the report said. “This means that workers may be experiencing greater competition for jobs and hence may be more willing to accept lower wages than before.”

The IFS analysis looked at salaries in real terms, which takes the inflation rate into account. It showed that many UK companies, particularly smaller businesses, have cut wages rather than lay off staff. Larger companies tended to reduce their workforce more but maintain wages.

“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,” Ms Crawford said.

In addition, the IFS pointed out that fewer workers are unionised or covered by collective wage agreements and they tended to see smaller wage increases. It also found that inequality has fallen - in sharp contrast to the 1980s recession and its aftermath - and that older workers have been much less affected than younger generations.

A Treasury spokesman said that despite the UK recovering from “the longest and deepest” recession in a century, the labour market had remained strong.

“The government understands the pressures that households face with the cost of living and has taken action to help including increasing the personal allowance, taking 2.7 million people out of income tax altogether and saving a typical taxpayer over £700, and freezing fuel duty for nearly three-and-a-half years,” he said.

On Tuesday the TUC said that total pay in some parts of the UK has shrunk by more than 10% since the start of the downturn in 2007. It said that north-west and south-west England had seen the sharpest cuts, 10.6% and 10.1% respectively. (BBC).-