Wages are falling – that’s bad 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.

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.

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.