Why Britain’s not getting a pay rise

Britain’s workers have gone for seven years without a decent pay rise, says Merryn Somerset Webb. Why’s that?


UK workers have gone seven years without a pay rise

Turn to the FT and you'll find a sad story. The UK's workers have gone seven years without a "decent pay rise" and it isn't a given that they will get one any time soon. Things hinted at looking up last year, but in the three months to the end of April (the busiest time for pay deals) the median rise came in at a mere 1.7%, down from 2% in the previous quarter.

On the face of it this is perplexing after all, unemployment in the UK is very low, and low unemployment is supposed to mean rising wages. Look a little closer, however, and you will see something a bit different.

Most people have jobs. But an awful lot of those jobs are part-time jobs when their holders say they would prefer that they were full time. A decade ago, 9% of part-time workers said they couldn't find full-time work. Today that number is 14%. So what's going on?

Subscribe to MoneyWeek

Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE

Get 6 issues free

Sign up to Money Morning

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Sign up

The place to start with the answer is to admit that we must, one way or another, have an oversupply of labour if we didn't, the price of labour would be rising fast. Next you might ask where that oversupply is coming from. For part of the answer we turn to the Daily Telegraph. Their front page tells us that the population of England will rise by four million over the next decade, with parts of the south seeing a 25% rise in the number of people. About half of that four million will be accounted for by our ageing population but the other half will come from immigrants.

In 2014 the foreign-born population of the UK was about 8.3 million people (13.1% of the population, some 20% of the working population and up from 3.8 million in 1993). There's been net migration of around 300,000 every quarter since. That takes us to ten million or so (I'm going approximate and conservative because numbers on migration are approximate). Add in the new two million and we are hitting 12 million.

What does this mean for wages? The conventional answer is not much. There is, we are told, no evidence that the large number of immigrants into the UK over the last decade has in any way affected wages. You will think this sounds odd (given that if you raise the supply of anything you will tend to push its price down). And you are right to do so it isn't quite true.

Look to the Bank of England's working paper on the matter. Their conclusion is simple: "the immigrant to native ratio has a small negative impact on average wages," with the biggest impact "within the semi/unskilled services occupational group." That makes more sense doesn't it? Certainly it fits better with what the Bank of England calls "intuition and anecdotal evidence" than the idea that a rise in the supply of something makes no difference to the price of that something.

So let's look at what "small" means in this context. According to the BoE, a ten percentage-point rise in the proportion of immigrants entering the workforce means a 2% fall in the wages of those in the semi/unskilled services sector (care homes, bars, shops etc). There are about 31.5 million people in the workforce in the UK. 60% of those are unskilled or semi skilled that's 19 million people. How many of those are foreign born workers? I can't find detail on this so let's make some assumptions.

Immigrants are more likely to be of working age than natives (obviously). They are also more likely to be in low or unskilled work than natives. So let's say that 55% of current immigrants work in the relevant sectors and that 55% of the new arrivals will too. Right now that makes them 28% of the semi/unskilled work force, or about three million people (something that fits neatly with the numbers in here). Onwards.

Now we have another two million immigrants on the way. Use the same assumptions and we have another 630,000 about to enter this area of the economy. Now they are 33% of the workforce up around 18% as a proportion of the workforce or five full percentage points, something that the BOE numbers suggest should push wages in the semi/unskilled sectors down 1%. That might not sound too awful.

But let's say you are a semi-skilled worker on £20,000 a year. You might normally expect the odd wage rise. You aren't going to get one. Instead, your wages have already been pushed down by the whopping levels of immigration so far and on my very, very conservative estimates you are about to lose another £200, the price oflow-cost weekend away for the family.

There's one more thing to think about here. In the UK, low wages don't just cost the workers in question, they cost all of us: most of what is lost in wage income will be made up in cash benefits via the tax credit system. Which all net taxpayers contribute towards.

Something for the economists who constantly saying they "don't recognise" the low wage problem and the immigration issue being linked to think about as they head off on their half term break.

Merryn Somerset Webb

Merryn Somerset Webb started her career in Tokyo at public broadcaster NHK before becoming a Japanese equity broker at what was then Warburgs. She went on to work at SBC and UBS without moving from her desk in Kamiyacho (it was the age of mergers).

After five years in Japan she returned to work in the UK at Paribas. This soon became BNP Paribas. Again, no desk move was required. On leaving the City, Merryn helped The Week magazine with its City pages before becoming the launch editor of MoneyWeek in 2000 and taking on columns first in the Sunday Times and then in 2009 in the Financial Times

Twenty years on, MoneyWeek is the best-selling financial magazine in the UK. Merryn was its Editor in Chief until 2022. She is now a senior columnist at Bloomberg and host of the Merryn Talks Money podcast -  but still writes for Moneyweek monthly. 

Merryn is also is a non executive director of two investment trusts – BlackRock Throgmorton, and the Murray Income Investment Trust.