Many news outlets—including the Daily Mirror, the BBC, Bloomberg, the Financial Times, the Telegraph, Sky News, the New Statesman and the Sun—have reported a “record” fall in real wages in the latest figures from the Office for National Statistics (ONS).
The latest fall in real wages (meaning wages adjusted for inflation) is certainly very large. And it could be called a record, at least within the official data going back to 2001, if you are talking only about wages excluding bonuses (also known as ‘regular pay’).
However it is not a record if you look at people’s total wages, including bonuses, because the ONS figures show a larger fall following the financial crisis in the spring of 2009.
It also may not be the largest fall that has ever happened, with historic data showing very deep falls in real wages in the 1970s, although this can’t be directly compared to the regular pay figures now.
We last wrote about this issue in June, when earnings including bonuses were rising but earnings without were falling.
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What are real wages?
If someone’s earnings increase, they may be taking home more money, but that doesn’t necessarily mean they’re better off. That’s because the price of the things they need to buy may be rising even faster. This rise in prices is called inflation.
So if someone’s wages rise by 5% in a year, they have earned more money in “cash” or “nominal” terms—but if prices also rose by 10% at the same time, they have actually become poorer in practice, meaning that their “real wages”, once adjusted to account for inflation, have fallen.
This is what is happening to many people right now.
What do the latest figures show?
In its latest data, published on 16 August, the ONS said that average total earnings (including bonuses) grew—in cash terms—by 5.1% in the year to April-June 2022.
However, because of the very high level of inflation, as measured by the Consumer Prices Index including owner-occupiers’ housing costs (CPIH), average total real wages fell by 2.5%.
This is a very large fall—the largest since 2009—which means the value of people’s earnings has dropped rapidly. But it is not the largest fall ever recorded by the ONS, as its data shows a 5.7% fall in total pay in March 2009. This data on annual changes does not go back further than 2001.
The ONS also reported a 3% fall in average real regular earnings, meaning earnings not including bonuses. This is a record fall—as much of the media reported—but it doesn’t quite show us the whole picture, because it misses out part of what people earned.
Xiaowei Xu, senior economist at the Institute for Fiscal Studies, said on Twitter: “Excluding bonuses overstates the fall in pay that we're seeing.”
The ONS says: “Bonus payments are continuing at the high levels seen over the last six months, after a slightly lower level in May 2022. Since August 2021, we have seen stronger bonus payments, particularly in March 2022 when the non-seasonally adjusted bonus payment was extremely high. The largest bonus payments are in the finance and business services sector.”
Is this the worst fall ever?
We can’t say for sure whether real regular wages have ever fallen more sharply in the past, because the data we have is based on a measurement called Average Weekly Earnings, which was only introduced by the ONS at the beginning of this century. As a result, we can’t easily compare the numbers we’re seeing now with what happened in the 20th century.
In 2014, the ONS did publish a document (downloads file) looking at changes in real total wages since the 1960s. This doesn’t show us regular wages (without bonuses), and it was calculated using a different measure of inflation called RPI, so isn’t perfectly comparable with the average weekly earnings data we have now.
However, it does show an extremely large fall in real total wages, by about 8% at one point, in the late 1970s. This may suggest that, at the time, real regular wages were also falling by more than they are now.
Image courtesy of Towfiqu barbhuiya