Thanks for clicking. Every month the economics team here at Deloitte look at significant economic trends from the point of view of the recruitment marketplace, and we are then able to share the resulting blog post with you. Number 1 is below.
The phrases 'wage squeeze' and 'income inequality' have been at the forefront of policy debates in recent months, both in the UK and abroad. The head of the International Monetary Fund, Christine Lagarde, recently warned global politicians that "in far too many countries the benefits of growth are being enjoyed by far too few people."
Falling wages and rising inequality are in many respects very different issues – wages could reasonably be expected to fall at the same time as the gap between rich and poor narrows – yet they are often talked of in the same breath, to describe an environment where a large proportion of the workforce have experienced both real and relative declines in wealth.
In the UK, a number of common powerful factors have created this environment for middle and low-paid workers.
Inequality has been on the rise across much of the West since well before the financial crisis and, in the case of the UK and the US, since the late 1970s. Secular trends such as technological progress, globalisation, the expansion of financial markets and the decline of unions have reduced the relative value of unskilled labour and bolstered the returns to high level skills and to capital. In much of the world labour's share of GDP has shrunk and the share going in profits have risen. This trend has clearly been a factor in constraining wage growth for many low and middle-income earners and at the same time contributing to widening inequality.
In this sort of a world, expertise, education and experience are at a premium. The most conspicuous examples are in the financial sector but this process has been at work across the economy. Since 1978, real incomes for UK doctors have risen 153%, for lawyers 114% and for quantity surveyors by 65%. Over the same period, incomes for fork lift truck drivers have fallen 5% and pay for unskilled production line workers has dropped 3%.
Such inequalities reflect, in part, widely differing levels of educational and training achievement not just across social groups but across generations. Recent OECD research came up with the alarming finding that that England is the only country in the developed world in which adults aged 55-to-65 outperform those aged 16-to-24 in literacy and numeracy tests. This fact may help explain why, since 2007, the number of under-24s in work has shrunk by almost half a million even as the number of over 55s in work has increased.
A more recent trend has occurred since the global financial crisis, which has caused a major squeeze on consumer incomes. Whilst real incomes actually rose during the recession, in 2008-09, they have since fallen as the economy moved back to growth. Since 2010 consumers have had to contend with falling real incomes, above average inflation, rising taxes and a squeeze on state benefit. Real incomes have fallen as a result, and have fallen for the longest period for 50 years. (The paradox is that all of this has occurred in an environment where the UK economy has created more than a million new jobs.)
The good news is that the worse of the squeeze on incomes in the UK is probably past. Our strong suspicion is that 2014 will be the year that average real earnings start to rise again. Indeed most economists now expect an improved labour market – with increased competition for labour – and lower inflation to deliver increases in real incomes over the next five years. The Bank of England forecast growth of 2.75% in average earnings in 2014.
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