Is the UK experiencing the biggest fall in ‘real wages’ in the last century?

The TUC (Trades Union Congress) has warned that due to inflation, pay in the UK may shrink considerably in real terms.

According to its most recent study, pay rises may lag well behind inflation by almost eight per cent by the end of this year.

This figure assumes that the Bank of England’s (BoE) latest predictions of inflation hitting 13 per cent this year become a reality, while workers’ pay only increases by 5.25 per cent – as it is currently forecast to do.

Due to this, real wages and, therefore, living standards, would fall by an unprecedented 7.75 per cent. According to the TUC, living standards haven’t fallen as sharply since the 1920s.

A key factor in driving up inflation to a peak of 13 per cent is rising energy prices. In fact, the BoE’s predictions were based on the fact that the price cap on average household bills would increase to £3,600 in October and may go up to as much as £4,200 in January 2023.

However, subsequent estimates by Cornwall Insight and other consultancies suggest that the average energy bill could jump as high as £5,000 next year, which could mean a higher peak figure of inflation than expected.

Of course, businesses themselves are under a lot of pressure due to rising energy costs and do not have the benefit of an energy cap. This means that in many cases they are having to restrict pay and push up prices for consumers.

This double whammy of lower pay rises, and higher prices mean that the average worker is being squeezed and faces difficult decisions ahead.

The TUC General Secretary, Frances O’Grady, said: “Real pay has fallen by more on only one occasion, a decline of 13.3 per cent in the fourth quarter of 1922 – as the post-First World War pay and price inflation went sharply into reverse. The only other comparable figure was 7.2 per cent in the first quarter of 1940.”

According to official figures, average total pay growth in the last two months has already dropped to 6.2 per cent, while figures from earlier in the year had been warped by the payments of bonuses in the City of London between February and April.

However, even in the prestigious finance and banking sector, pay is down from a recent peak of 15.4 per cent in the year to March to 13.6 per cent in the year to May 2022.

If you are struggling with employment costs or aren’t sure of the best way to set rewards and benefits for your employees, please speak to our payroll team today for advice.