Merryn's Blog

Wages are falling - that's bad for the economy

Wages are falling - or at best not rising enough to keep up with rising prices. And that's bad news for the economy.

A friend pointed to a newspaper article on starting salaries in the City. It is a total scandal, she said, that graduate trainees are getting paid an average of £45,000.

She might be right. But for me that wasn't the interesting bit. The interesting bit is that when I started in the City as a broker nearly 20 years ago, my starting salary was about the same forty something thousand pounds. That means that real salaries for young people getting started in the City i.e. adjusted for inflation have plummeted.

Subscribe to MoneyWeek

Become a smarter, better informed investor with MoneyWeek.

You may find it hard to drag up much sympathy for people getting paid going on double the national average wage before they've had their first PowerPoint training session, and that's fair enough. But it isn't just about them: real wages have been falling across the economy for some time now. Note that in the first three months of the year private sector pay (excluding bonuses) rose by a mere 1.2% on an annual basis. Those who get bonuses did a little better, with a rise of 3.6%, but even they lost in real terms.

The Consumer Price Index was rising at 3.4% in March and 3.7% in April. But the index that most people use to measure their purchasing power the Retail Price Index jumped to 5.3% in April. So the average worker is currently suffering a real pay cut of around 3%. And that's before George Osborne and Vince Cable really get going on the public sector.

Advertisement - Article continues below

This number tallies unpleasantly with news that salaries for people taking new jobs (not their first job, just a new job) fell 3% last month in nominal terms, thanks to rising unemployment allowing employers to pay less to those they do offer jobs to.

There is a view that rising inflation is good for most of us it erodes the real value of our debt, making it easier to pay off. But that only works if wages are rising too: if the real value of your wages is falling, the fact that the real value of your debt is too will only be of limited comfort.

But falling real wages aren't just about the debt we have. They are about the amount of debt we are prepared to take on, and the amount of money we both have and are prepared to spend.

If you aren't expecting a raise you are less likely to over spend on dresses or to buy a new TV for the world cup, and certainly less likely to borrow to do either. That's bad news for an economy still heavily dependent on service industries for growth.




How long can the good times roll?

Despite all the doom and gloom that has dominated our headlines for most of 2019, Britain and most of the rest of the developing world is currently en…
19 Dec 2019

Beyond the Brexit talk, the British economy isn’t doing too badly

The political Brexit pantomime aside, Britain is in pretty good shape. With near-record employment, strong wage growth and modest inflation, there is …
17 Oct 2019

Rishi Sunak: the maharaja of the Yorkshire Dales

Rishi Sunak is taking the reins of the world’s fifth-largest economy at a crucial juncture. The unflashy but likeable youngster may be just the man fo…
20 Feb 2020
UK Economy

What is Britain’s new economic policy?

At the moment, Britain doesn’t seem to have an economic policy. But radical-seeming announcements and the surprise ousting of the chancellor portend m…
20 Feb 2020

Most Popular

Stocks and shares

Do you own shares in Sirius Minerals? Here’s what you need to do now

Mining giant Anglo American has proposed a cash takeover of Yorkshire-based minnow Sirius Minerals. Unhappy shareholders must decide whether to accept…
20 Feb 2020

Gold is at its highest level in years – here’s how to invest

Gold's rise at a time when the dollar is unnervingly strong isn't unheard of – but it is curious. John Stepek explains what's going on, and what it me…
21 Feb 2020
Share tips

Share tips of the week

MoneyWeek’s comprehensive guide to the best of this week’s share tips from the rest of the UK's financial pages.
21 Feb 2020

Why investors shouldn’t overlook Europe

SPONSORED CONTENT - Ollie Beckett, manager of the TR European Growth Trust, tackles investor questions around Europe’s economic outlook and the conseq…
6 Nov 2019