Pay Blues

The Office for National Statistics has calculated that adjusted for inflation, UK employees are now earning £15 less a week after tax and deductions than they were in March 2008, six months before the collapse of Lehman Brothers and the global financial crisis.

UK consumers are suffering a sustained fall in living standards as real pay fell again in the three months to May, piling more pressure on cash-strapped households.

Regular pay adjusted to account for the impact of inflation fell by 0.5% year on year over the period, shrinking family incomes and signalling a weaker outlook for consumer spending.

It followed a 0.6% drop in real pay in the three months to April, and a 0.4% fall in the previous three months, according to figures from the Office for National Statistics.

Real pay fell despite a surprise drop in the unemployment rate from 4.6% to 4.5%, which was the lowest since May to July 1975. The employment rate rose to 74.9%, the highest since comparable records began in 1971.

The TUC general secretary, Frances O’Grady, said: “Three months of falling pay is three months too many."

The prolonged drop in real wages reflects the rising pressure on household budgets as prices rise at a faster rate than pay.

John Hawksworth, chief economist at PwC, said it was a striking point of the modern economy that wage growth was so weak despite low unemployment. “In the 1970s or 1980s such low unemployment, combined with inflation rising towards 3%, could have set off a wage-price spiral. Real earnings growth remains deep in negative territory and this seems unlikely to change any time soon. This will dampen consumer spending power, though the continued strength of the jobs market should prevent the recent slowdown in the economy turning into a recession.”

Ian Kernohan, an economist at Royal London Asset Management, said “Inflation is now above the Bank’s [2%] target level and real earnings growth has slipped into negative territory,” he said. "This is having a negative impact on household spending."