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Young workers experienced ‘sharp pay deterioration’ last year

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Written by: Emma Lunn
22/03/2021
Half of workers experienced ‘a real-terms pay cut’ last year, despite official data suggesting the fastest pay growth in nearly two decades, according to the Resolution Foundation.

The think tank’s latest quarterly Earnings Outlook found that pay growth was far weaker and more volatile last year than official headline data suggests.

The report examined what really happened to pay packets during the pandemic, with the official Average Weekly Earnings (AWE) series having been hugely disrupted by widespread furloughing across the labour market.

Official figures show that nominal average weekly earnings growth reached 4.5% in late 2020 – its highest level in almost two decades, despite the economy experiencing its biggest contraction in more than 300 years. This is in sharp contrast to the last recession which caused a major pay squeeze.

But the Resolution Foundation says this level of pay growth ‘feels too good’ to be true – and on close examination this turns out to be the case.

The Earnings Outlook found large variations in the strength of pay growth across the workforce. Earnings growth among higher-paid workers (at the 75th percentile) was relatively strong and stable – fluctuating between 2.4% and 2.6% between April and December 2020, after adjusting for workforce composition.

In contrast, growth among lower-paid workers (at the 25th percentile) was far weaker and more volatile – fluctuating between 0.2% and 1.4%.

Turning from average pay across the workforce to how individual workers’ pay packets have changed, the report identified further evidence that earnings growth is far weaker than the headline data suggests.

The median pay rise among individual workers was just 0.6% last Autumn (Q3 2020) – a real-terms pay fall of 0.2% – meaning at least half of all workers experienced a pay cut.

The median pay rise increased to 1.8% in Q4 2020 (1% in real terms) – an improvement, but still the second lowest since mid-2013.

Finally, looking at pay growth for workers across the age distribution, the report found that younger workers have experienced the biggest deterioration in annual pay growth.

Among 18 to 24-year-olds who were still in work a year on, annual pay growth fell from 12.3% in 2019 to 6% in 2020. Among 25 to 34-year-olds, annual pay growth fell from 4.9% to 1.4%. This pay deterioration comes on top of the fact that younger workers have been more likely to be affected by furloughing and job losses.

Pay growth also fell for all other age groups. However, annual pay growth for workers aged 35 and over is lower anyway as these workers tend to be less likely to move jobs.

The Resolution Foundation warned that sharp falls in pay growth for young workers can potentially scar young workers’ pay prospects for years to come.

Hannah Slaughter, economist at the Resolution Foundation, said: “The economy experienced its biggest recession in over 300 years last year, with a third of private sector workers put on furlough at its peak. And yet somewhat implausibly, pay growth reached its highest level in almost 20 years.

“Sadly, the story of bumper pay packets from official headline data is too good to be true. In reality, half of all workers experienced a real-terms pay cut last Autumn, with pay growth deteriorating most among those who have been hit hardest by the pandemic – the young, the low-paid, and those working in social sectors like hospitality.

“This pay deterioration is particularly concerning for young workers as it risks scarring their pay for many years to come. The government should therefore prioritise getting young people’s pay and careers back on track during the recovery, and that is likely to require further policy action beyond that announced in the Budget.”

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