Bitesize Economics: Real Wages

Real wages measure purchasing power – how much wages are actually worth, taking inflation into account. This is important for thinking about the cost of living. If my wage increases by 10% but the cost of everything I buy increases by 15%, my real wage (the only one that matters) has decreased. Economically, this is really what we care about: can I afford to buy more things than I used to?

This can only happen in a sustained way by increasing productivity, by generating more wealth for the same amount of labour. So as economies become more productive, real wages should rise, living standards should increase, and the economy should grow.

This seems important. Has it happened in the UK?

There are a few things to note here.

Firstly let’s consider real wages at the micro level.

It’s sometimes hard to know if you’re doing “well” or if you’re “on the right track” (or not). One cause of this type of anxiety is income. I see this a lot: people wondering if their wage is “correct” for their age or location or hair colour.

Start by comparing to this: the median weekly income for full-time employees in the UK was around £665 in 2022. Quick maths: £650 a week is £2,600 a month and £31,200 a year. But remember kids: that’s the middle income for everyone in the UK. As in if you ranked everyone by income and selected about the 15 millionth person, that would be their income. So if you’re a 45-year-old working in London, you should probably be earning a bit more (if you care about this sort of thing). And if you’re a 17-year-old from Aberystwyth, maybe a bit less.

Remember what I was saying about that 45-year-old? Earnings peak in your 40s, when you’ve amassed 20 years+ of experience and knowledge and still have the energy and drive to be “successful”. Older people have one eye on retirement, their skills and knowledge atrophy, and they’re expensive to employ.

Source: ONS (Annual Survey of Hours and Earnings). Monetary amounts are pounds per week in 2022 prices, adjusted using CPI.

When it comes to wages, London is a different country. Hence the need to adjust for region when thinking about, well, anything when it comes to UK wages.

In terms of real wage growth, it seems that the UK hasn’t been doing a whole lot of it. This is partly due to the fact that, well, they haven’t. But this is also a consequence of the specific timeline we are looking at. 2020-2022 were not the best years for growth, particularly when we consider that we are looking at real wages. Remember, data can lie.

Data from the IFS looking at an extended timeline tells a different story. Despite how apparently shite the UK is, real wages have been steadily increasing.

This is testament to how materially better our lives have become. There’s a reason your grandad still has a deeply-ingrained scarcity mindset: he grew up amidst rationing and shortages, a time when a stick of butter was a luxury. Or why your mum said that they had to split a mars bar between a family of 8 and had to go to their neighbours’ house to crowd round a small TV to watch Top of the Pops. Now I can nip down to Tesco Express and pick up a Mars bar and butter for about four quid. And I can get a better, bigger, thinner TV for £100.

The IFS data also provides insights into (static) inequality:

Median income in 1960 was at around the same level as mean income (£200). But as we move to the present the two begin to subtly diverge such that today, mean income is over 20% higher than median. This seems to have been caused by out-sized increases in top-percentile wages in the 80s and beyond. Since 1980, the 5th, 50th, and 95th percentile incomes have grown by 60%, 90%, and 130% respectively. The relative income gap between these groups is becoming larger.