Recession prompted 'unprecedented' fall in wages

Workers may be accepting lower wages for fear of greater competition in the jobs market

Wages have fallen more in real terms in the current economic downturn than ever before, according to a report.

On top of the rising cost of living, a 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.

Labour said the figures showed there was a "living-standards crisis".

The think tank found the pay gap between public- and private-sector workers has "increased substantially" in the past four years.

It said "average real hourly wages" had fallen faster in the private sector than the public sector over the last few years.

In 2009, the average public-sector worker earned about £16.60 per hour, which dropped to about £15.80 in 2011, the IFS said. Meanwhile, hourly pay for private-sector workers in 2009 was just over £15.10 and dropped to about £13.60 in 2011.

'Not good enough'

Labour leader Ed Miliband said the figures showed "people's wages have fallen on average by over £1,300 a year" since the coalition came to power.

In the Commons he accused David Cameron of ignoring the "living-standards crisis that is facing families up and down the country".

"He's into his fourth year as prime minister, and his excuse for falling living standards is: 'Don't blame me - I'm only the prime minister.' It's simply not good enough."

The PM said "living standards are under pressure" but that a freeze in council tax and income tax cuts would help.

"Over the last year, while we've lost 100,000 [jobs] in the public sector, we've gained five times that amount in private-sector employment," Mr Cameron said.

The IFS report comes a day after union organisation the TUC found pay in some parts of the UK had shrunk by more than 10% since the start of the downturn in 2007.

'Productivity puzzle'

The IFS analysis looked at salaries in real terms, which takes the inflation rate into account.

It showed many UK companies, particularly smaller businesses, have cut wages rather than lay off staff. Larger companies tended to reduce their workforce but maintain wages.

IFS experts said this could explain the so-called 'productivity puzzle" where there is a fall in UK output while employment has held up.

It said lone parents and older workers were not giving up work, which may in part be due to changes to the welfare system.

"This means that workers may be experiencing greater competition for jobs and hence may be more willing to accept lower wages than before."

Ms Crawford said: "The falls in nominal wages that workers have experienced during this recession are unprecedented, and seem to provide at least a partial explanation for why unemployment has risen less, and productivity has fallen more, than might otherwise have been expected."

'Less unionised'

The IFS said fewer workers are unionised or covered by collective wage agreements and tended to see smaller wage increases.

It also found inequality has fallen - in contrast to the 1980s recession and its aftermath - and older workers have been less affected than younger generations.

A spokesman for the Confederation of British Industry (CBI) said it had long argued pay restraint had protected jobs.

"The risk is that average wage growth could be so slow, that the national minimum wage might start to outstrip it in certain sectors - so the Low Pay Commission has to keep an eye on it before the new rates kick in later this year."

Tim Jones, a college lecturer in Dorset, told the BBC his hours had increased and his salary had been frozen since 2009.

"We have been forced to effectively work for less pay per hour than we were earning 10 years ago," he said.

James Clark, from Godalming, had a wage freeze between 2008 and 2011.

"I just couldn't keep up with my basic costs, such as season ticket, utilities, weekly food shop, mortgage," he told the BBC.

A Treasury spokesman said the labour market had remained strong, even though the UK was recovering from "the longest and deepest" recession in a century.

"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.

Figures released on Wednesday showed UK unemployment has fallen by 5,000.

Office for National Statistics (ONS) data indicated 2.51 million people were out of work in the three months to April.