How has wage growth varied across the UK economy during the pandemic?
Covid-19 has had uneven effects on people’s health, finances and jobs. There is wide variation in the impact on earnings across the economy, particularly between the public and private sectors. Sectors with high shares of furloughed workers have experienced low wage growth.
Average earnings across the economy fell by around 5% in the months following the first outbreaks of Covid-19 in Great Britain, with pub and restaurant workers the worst affected.
With most furloughed workers receiving less pay than usual, the proportion of workers in a particular sector who have been furloughed provides a good guide to how much wages in that sector fell in the early months of the pandemic.
What do we know about how people’s earnings have been affected by coronavirus?
According to the Office for National Statistics (ONS), seasonally adjusted average weekly earnings across the UK economy were 1.8% higher in September 2020 than in February – the last full month before the pandemic hit (ONS, 2020). Earnings fell sharply at the start of the pandemic before recovering during the summer as the economy gradually and partially returned towards ‘normal’ (see Figure 1).
Figure 1: Average weekly earnings (seasonally adjusted)
As well as changes in wages for individuals, average wage growth can be affected by the composition of the wage-earning workforce. If a disproportionate number of low-paid jobs are lost during a crisis, the average wage of those that remain will rise. According to the ONS, this has had only a small upward effect on the average (0.1% of the pay growth in July to September).
Real wages (wages adjusted for the prices of a basket of goods) also fell at the start of the pandemic but, as inflation has gone down since April 2020, some of the pain of lower nominal (or more slowly growing) earnings has been offset by prices not rising as fast as they would have done otherwise (see Figure 2).
Figure 2: Real wages (seasonally adjusted, constant 2015 prices)
Have some groups of workers been affected more than others?
The members of the workforce who have seen the largest falls in their income in 2020 are those who have lost their jobs: the hospitality sector has been worst hit. Despite the temporary increase in the generosity of Universal Credit, out-of-work benefits still represent a relatively small proportion of earnings: around a third for single person without children on the average (OECD). Others who have been badly affected are those who do not qualify for any of the government’s support schemes for employees, the self-employed or business owners.
Those in their early 20s were most likely to be furloughed (more than 50% of those eligible), while the earnings of the poorest households were most negatively affected, though the social security system helped to offset this (see Brewer and Handscomb, 2020 and Bourquin et al, 2020).
How have wages in different sectors of the economy been affected?
The same is true of earnings in different sectors. Public sector earnings have risen more quickly (3.7% annual growth, July to September 2020) than those in the private sector (0.8%), and wages in finance and business (2.4%) have risen more quickly than those in manufacturing (-0.2%) and construction (-3.9%).
One likely reason for this is the Coronavirus Job Retention Scheme (CJRS), under which the government pays 80% of usual wages for employees who are not at work, and employers have the choice whether or not to ‘top up’ earnings (partially or all the way up to 100%).
According to the ONS Business Impact of Coronavirus Survey, less than half of employers have been providing some form of top-up, which is likely to have had an effect on average wages in the economy. For example, if nothing else changes, 50% of workers taking a 20% pay cut (by being on furlough) would reduce average pay by 10%.
Unsurprisingly, the proportion of workers furloughed in a sector is negatively correlated with wage growth in that sector. One study by the National Institute of Economics and Social Research (NIESR – see Figure 16 in ‘Prospects for the UK economy’) looked at this pattern in the early months of the pandemic (see Figure 3 below).
Sectors towards the top left of the chart, including several with a high proportion of public sector workers, had very low shares of workers furloughed and relatively strong wage growth. Those towards the bottom right, including the hospitality, arts and construction sectors, had lots of employees furloughed and weak wage growth, suggesting that the pay cuts experienced by many furloughed workers were largely responsible for the weaker wages.
Figure 3: Degree of furloughing (mid-June) and wage growth between February and June by sector
There are other reasons why we might expect public sector wages to grow more strongly than private sector wages during such a period. Wages in the public sector are generally less cyclical than those in the private sector (see Dolton et al, 2020), which means that they grow comparatively more slowly in economic expansions but more quickly during recessions. For example, the private/public sector pay ratio fell during the global financial crisis of 2008/09, and then rose in the decade that followed.
The pandemic may also have seen increased demand for labour – something that would normally be expected to raise wage growth – in parts of the public sector, such as healthcare and Jobcentres, at a time when vacancies and job creation have dramatically fallen across the economy as a whole. (Overall public sector employment has risen by around 300,000 since the first quarter of 2020, while private sector employment has fallen by nearly 800,000.)
Is it fair that some earnings have fallen more than others?
If the government had chosen to replace furloughed workers’ wages at 100%, much of this ‘sectoral divergence’ would probably not have happened. On the other hand, if the government had not introduced the CJRS at all, unemployment in the worst affected sectors would probably have risen very quickly, rapidly reducing the incomes of those who had been working in these sectors. As increased unemployment is also something that normally exerts a downward pull on wage growth, wages in those sectors might have fallen even further.
Much of the inequality between sectors has resulted from the unequal impact of coronavirus on social and economic relations. Some areas of life have been more exposed to the virus than others, and naturally there has been greater take-up of government support in those sectors where businesses may not have survived without it. Following such an uneven shock, the government then decides how much of that sectoral inequality to mitigate with its economic policies.
Where can I find out more?
- The National Institute of Economic and Social Research report on wage growth in different sectors is part of their November Review, published here.
- Resolution Foundation research on the impact of government support schemes across the age distribution is published here.
- The Institute for Employment Studies has released a number of reports on the effects of Covid-19 on employment and wages, including on the low-paid, vacancies and redundancies that are taking place.
Who are experts on this issue?
Author: Rory Macqueen (NIESR)
Published on: 13th Nov 2020
Last updated on: 16th Nov 2020