Why has it taken so long for stagnant pay to become central to UK politics?

Many people in Britain haven’t had a real-terms pay rise since the global financial crisis. In the wake of the recent spike in inflation and interest rates, this is finally becoming a pressing political issue. The fact it has taken so long reveals a long-term shift in the balance of economic power.

Since 2022, the UK has witnessed a wave of pay strikes on a scale not seen for decades. The short-term pressures that provoked such industrial action lie in the cost of living crisis that developed in 2021.

This was driven to a significant extent by external factors such as issues with global supply chains after the Covid-19 pandemic, the Russian invasion of Ukraine and rocketing energy prices. But these blows struck a longstanding sore point among the country’s working population, namely stagnant pay.

Figure 1: Annual growth in average weekly earnings (regular pay) and consumer price index including housing, 2001-23

Source: Resolution Foundation (analysis of Office for National Statistics labour market and consumer price inflation data)

By the time inflation started to surge, both productivity and pay had been stagnating for well over a decade.Real wages grew by an average of 33% each decade from 1970 to 2007; but they are now back at the level they were at in 2005, according to data from the Office for National Statistics, ONS (Times, 2023).

Indeed, the Resolution Foundation calculates that after 15 years of stagnation, average earnings are £230 below the trend before the global financial crisis of 2007-09 (BBC, 2023).

Figure 2: Average weekly wages, adjusted for inflation

Source: ONS

Note: Based on December 2022 prices

This issue has long been raised by voices on the left of the political spectrum. But in the last couple of years, it has forced its way to the fore more broadly.

In a speech at his eponymous institute’s Future of Britain conference in July, former prime minister Tony Blair drew on OECD data to lament that ‘since 2007, the average UK worker has received no real pay rise’ (Tony Blair, ‘Progressive Politics and the Strategic State’, 2023). During his time in office, from 1997 to 2007, pay trouble was not an issue with which he was particularly associated, but then he didn’t need to be: across that period, wages consistently rose above inflation.

Why did the global financial crisis lead to pay stagnation rather than mass unemployment?

The age of steady growth ended with the global financial crisis, when it emerged that banks were riddled with hidden high-risk housing debt, triggering a credit crunch.

The cashpoints in the UK came within hours of drying up; and the government felt compelled to recapitalise HBOS, Lloyds and Royal Bank of Scotland. The financial system survived, but growth slumped by more than 5%, beginning a deep recession (ONS, 2018).

Previous downturns in the early 1980s and early 1990s had led to steep rises in unemployment and many expected that something similar would happen again in the late 2000s.

As Gavin Kelly, then the prime minister’s deputy chief of staff, has noted, ‘there was a lot of pain from [the post-2008] recession’, but this time it was ‘spread more widely across the working age population’ (Pay Freezes, BBC Radio 4, March 2022).

The pain took the form of cuts in wages and hours, along with moves to lower-paid work, which workers accepted as a way to avoid job losses.

One reason that the reliance on pay cuts was possible was that the pound fell by around 27%, which made imports more expensive and pushed up prices. This ‘meant that employers were able to adjust to lower output by allowing real wages to fall rather than cutting jobs’ (Count the Pennies, Resolution Foundation, 2018).

But this also exposed a long-term shift in the balance of economic power. In the post-war period, workers had responded to real-terms pay reductions by striking, but since the early 1980s, this had become more difficult.

Economically, large-scale and heavily unionised manufacturing had declined. Politically, priorities had shifted from preserving full employment to maintaining low inflation, while legal reforms had weakened trade unions’ leverage.

Rather than repealing those laws, the New Labour government from 1997 relied on the economy’s steady growth, bolstered by tax credits and a national minimum wage, to ensure that working people’s incomes improved. By 2008, union membership was barely half what it had been in the 1970s, and the decline in the private sector was particularly marked.

As the economy recovered in the early 2010s, it became clear not only that pay was stagnating, but that the labour market had become more precarious, with the growth of self-employment and insecure ‘gig economy’ contracts. This made it all the more difficult for workers to push for higher pay.

What effect did austerity have on the politics of pay?

Another reason that unemployment did not spike in the recession that followed the global financial crisis was that – as prime minister from 2007 to 2010 – Gordon Brown ‘deliberately ran a deficit’. As he later explained, this was ‘to keep people out of unemployment, to stop mortgage repossessions, to stop business bankruptcies’ (New Statesman, 2020). By the April 2009 budget, government borrowing neared £175 billion.

After the Conservatives came to power in 2010 in coalition with the Liberal Democrats, Brown’s deficit was seen to make it necessary to implement significant cuts in government spending, including a two-year freeze in public sector pay.

As the new chancellor, George Osborne, put it: ‘Many millions of people in the private sector have in the past couple of years seen their pay frozen, their hours reduced and their pension benefits restricted. [...] The public sector was insulated from those pressures but now faces a similar trade-off.’ (Financial Statement, 2010).

The early 2010s did see significant attempts to make pay stagnation a political issue. In 2013, the Labour leader Ed Miliband criticised his party’s approach while in government for propping up a low-wage economy with tax credits.

He also accused prime minister David Cameron of allowing the worst living standards crisis since 1870 (The Guardian, 2013). He called for Labour to back the increasingly prominent campaign for a ‘living wage’.

More surprisingly, a chorus of warnings about pay arose from conservatives and free marketeers. In 2010, Ferdinand Mount, one-time head of the Downing Street Policy Unit under Margaret Thatcher, bemoaned the stagnation of lower incomes over the past five years in a book called Mind the Gap: The New Class Divide in Britain.

In 2012, the Financial Times reported that a major theme at that year’s World Economic Forum in Davos was the ‘severe income disparity’ between ‘some lavishly remunerated people at the top and the majority who have seen wages stagnate’ (Financial Times, 2012). In 2013, the future Conservative cabinet minister Matt Hancock called for the minimum wage to be strengthened (ConservativeHome, 2013).

Ed Miliband had insisted that pay stagnation would dominate the 2015 election, but it didn't turn out that way. Labour post-mortems found that voters were broadly supportive of the Cameron government’s attempts to reduce spending, and wary of Labour for supposedly crashing the economy before 2010 (The Guardian, 2016).

In his post-election budget, the chancellor, George Osborne, did respond to the calls for a strengthening of the minimum wage by introducing a ‘national living wage’. He set this at a lower level than campaigners had called for.

Nonetheless, this served to drive up the incomes of millions of the lowest paid, eventually raising the minimum wage to 60% of median wages. But Osborne also fixed public sector pay awards at 1% for four years; meanwhile, productivity remained stubbornly flat.

How politically visible was pay stagnation?

Historically, mass unemployment has tended to hit some regions of the UK much harder than others, but it produces vivid, politically potent imagery. The 1930s slump prompted hunger marches, and the hit stage play Love on the Dole. From the 1940s to the 1970s, such images helped to entrench full employment as the goal that governed British politics.

Stagnant pay, by contrast, is diffused across a much wider proportion of the economy. The 2010s generated little to compare with those searing images from the Great Depression. This lack of visibility was strongly reinforced by the fact that after the global financial crisis, the Bank of England kept interest rates close to zero for over a decade. This cushioned the impact of stagnant pay for the middle classes by keeping mortgages affordable.

Figure 3: Bank of England bank rate, 2013-23

Source: Bank of England

London and the South East of England prospered through the 2010s, helped by buoyant asset prices and the City of London’s rapid, taxpayer-assisted recovery. Pensioners, a crucial segment of the Conservative Party’s electoral base, were generally unaffected by stagnating pay.

All of this meant that the problem could be regarded merely as an unavoidable side-effect of recovery, not an urgent issue.

Figure 4: Annual house price rates of change for all dwellings, UK, 2006-23

Source: ONS

When distress signals about stagnant pay did make themselves heard, they rapidly became muffled by other issues. Young people were hit unusually hard by the global financial crisis, as companies paused recruitment, choking off well-paid starter jobs.

Even in the previous decade, the median income of those aged 20-29 had risen by 10% less than those of 45-54-year-olds (Survey of Incomes, HMRC, 2010). In 2015, the consequent disaffection arguably contributed to the surprise election of Jeremy Corbyn as Labour leader, but his leadership did not prove an effective vehicle for addressing the issue.

Further, in 2016, the Brexit referendum offered voters an eye-catching way to register their discontent. The architect of the Vote Leave campaign, Dominic Cummings, has argued that its messaging was aimed in significant part at galvanising a post-financial crisis desire to take back control from ‘the guys who screwed up the economy, who drove it off a cliff in 2008’ (Cummings, ‘Why Leave Won the Referendum’, Ogilvy Nudgestock, 2017).

Initially, the result did focus attention on the economic difficulties faced by many areas that voted Leave. In a speech shortly after the vote, Andy Haldane, then chief economist of the Bank of England, noted that real-terms earnings were still around 5% lower than in 2009. This was, he observed, ‘the longest period of flat or falling real wages since at least the middle of the 19th century’ (Haldane, Whose Recovery?,2016).

In the wake of the referendum, Theresa May became prime minister, and promised that her government would make a priority of the interests of the many who could ‘just about manage’ (Theresa May, 2016). Launching her campaign, she had promised to change the law to tackle the ‘irrational, unhealthy and growing’ pay gap between workers and bosses (Theresa May, 2016). But once May had failed to win a majority in the 2017 election, her government was consumed by the struggle to secure parliamentary approval for a Brexit deal.

It was not until the 2019 election that demands for ‘levelling up’ truly cut through to Westminster – only for the Johnson government to be overwhelmed, within months, by the pandemic.

How have Covid-19 and the cost of living crisis changed the picture?

For many, the pandemic forced a sudden reappraisal of the value of work. As most of the population entered lockdown, a range of people in low-paid jobs – from cleaners to delivery drivers to supermarket shelf-stackers – were exempted on the basis that, like doctors and nurses, they were the country’s ‘key workers’.

The government collaborated with the Confederation of British Industry (CBI) and the Trades Union Congress (TUC) to spend unprecedented sums on the job furlough scheme to protect the livelihoods of millions of employees.

When the economy re-opened, average real earnings initially kept pace with price inflation, but from late 2021, as energy prices spiked, they fell sharply behind. Coming on top of more than a decade of stagnant pay, strikes broke out on the railways and across the public sector, even among the medical professionals who had led the fight against Covid-19.

At one point, it emerged that half of the UK’s NHS trusts were providing food banks for their staff (Observer, 2023). In an echo of the job furlough scheme, the government felt compelled to introduce an ‘energy price guarantee’ to limit the impact of soaring energy bills on households, even as interest rates drove up the cost of mortgages and rents.

On the one hand, all this finally made the issue of stagnant pay unavoidable. On the other hand, the huge cost of government interventions to protect incomes has only increased the pressure on a heavily indebted government to restrain public sector pay rises. Labour argues both that it will put working people first, but also that the only route back to pay growth lies through reviving productivity growth.

The question for whoever forms the next government is whether people are willing to wait any longer.