Young people’s wages: the numbers look scary… because they are scary

The squeeze on young people's pay is only going to get worse.

The economic plight of young people has been one of the recurring themes of recent years – most importantly the rise of youth unemployment which has topped one million and the steep rise of long-term youth unemployment. Yet for all the debate about the labour market position of young people, very little attention has been given to their wages.

If we look back over the last decade what we see appears rather scary. It’s very widely known that typical real wages have been falling post-crisis, and that they stagnated for some years prior to the recession across the wider working population.

But those aged 16-29 didn’t just experience stagnation – they saw a significant fall in wages, which has carried on since 2008: typical pay fell for this group by 6.4 per cent from 2003-2010, or 8.6 per cent for men. And if we add to this the typical wage squeeze that occurred across the working population in the annus horribilis of 2011 this suggests a wage fall of over 10 per cent for young people during 2003-2011. And it will get worse yet.

Source: Resolution Foundation analysis of ASHE

It’s not immediately obvious what is happening here and different accounts are possible.

One view would be that this isn’t really a story about what is happening to the wages of the British born workers, it’s just a description of the greater migration that occurred in this period. According to this argument the composition of young workers in Britain has changed and so, therefore, have wages: as young foreign workers tend to be concentrated in low-paying sectors, so typical wages have fallen. 

I haven’t seen a definitive study specifically on the impact of migration on the wages of young workers, so it’s important to tread carefully. But I’d be very surprised if this change in the composition of young workers didn’t account for any element of these findings, just as I’d also be surprised if it accounted for all of it. The ONS has looked at the wages of British born and non-British born young workers during the years running up to the crisis. Looking at the 18-24 group, to the extent that there is a discernible pattern it is that the wages of the non-British born group were higher than their British born counterparts up until 2004. They then they fell behind in 2005 and 2006, before the situation was reversed again in 2007 and 2008.  At first glance it doesn’t look decisive.

Another account might be that the chart above is really just capturing a growth in part-time working (with lower wage rates) among young people which is dragging down median wages. Again, there is likely to be an element of this occurring but it can’t be the only factor. If we just look at what is happening to full time median wages we see they also fall through this period– though a smaller amount than for all employees.

Alternatively, and for me more plausibly, it could be that these numbers look scary because they are, actually, genuinely scary. For many economists the performance of young people in the jobs market is a barometer – or an early warning signal – of the health of the wider economy.

Even though the overall UK economy kept growing from 2004-2008 it is noteworthy that sectors where young people tend to work were struggling during this period (a point emphasised by the recent David Miliband-led ACEVO commission). The recession may have hit the young before the rest of us. Wholesale, retail, hotels and restaurants are by far the largest employers of young people. They saw an increase of around 300,000 jobs between 2001 and 2004 before employment plummeted by around 200,000 between 2004 and 2007. Falling demand in key sectors may well have put downward pressure on young people’s wages as well as on employment levels. On top of this, it’s also likely to have eroded opportunities for career progression – with fewer ladders and more snakes – making it harder to get a promotion or an upward move to a new job (which may well affect earnings mobility over the longer term).

And we should bear in mind the importance of the national minimum wage (NMW) in this debate. Dramatically more young people are paid at or near the NMW than is the case for the rest of the workforce, so changes in its level have a larger knock on effect on the wages of this age group. Following steep increases from 1999-2003 the minimum wage then levelled off in real terms from around 2004 (the same is true for the young person’s rate). So a weakening in NMW policy over time may be part of the explanation. 

Young people in the UK are not the only ones suffering persistent falls in wages. The Economic Policy Institute in the US have analysed the far starker trend in young people’s wages there (though they don’t consider migration effects). Looking specifically at the entry level wages of 19-25 year olds for both high school and college graduates the EPI show that rising wages for young people have been the exception rather than the norm over recent decades. Male high school graduates saw a 25 per cent fall in hourly wages between 1979 and 2011; even male college graduates only secured a five per cent rise over this whole period (women performed significantly better, though starting from lower wage levels).

In the UK youth unemployment is - or at least should be - public enemy number one. It dominates all else. But when steady growth eventually returns it is essential that we have a jobs market that sees wage gains reach all age groups. After the long fall, the young need a pay rise more than any. 


Jobseekers queue outside a Jobcentre. Photograph: Getty Images

Gavin Kelly is a former adviser to Downing Street and the Treasury. He tweets @GavinJKelly1.

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Stability is essential to solve the pension problem

The new chancellor must ensure we have a period of stability for pension policymaking in order for everyone to acclimatise to a new era of personal responsibility in retirement, says 

There was a time when retirement seemed to take care of itself. It was normal to work, retire and then receive the state pension plus a company final salary pension, often a fairly generous figure, which also paid out to a spouse or partner on death.

That normality simply doesn’t exist for most people in 2016. There is much less certainty on what retirement looks like. The genesis of these experiences also starts much earlier. As final salary schemes fall out of favour, the UK is reaching a tipping point where savings in ‘defined contribution’ pension schemes become the most prevalent form of traditional retirement saving.

Saving for a ‘pension’ can mean a multitude of different things and the way your savings are organised can make a big difference to whether or not you are able to do what you planned in your later life – and also how your money is treated once you die.

George Osborne established a place for himself in the canon of personal savings policy through the introduction of ‘freedom and choice’ in pensions in 2015. This changed the rules dramatically, and gave pension income a level of public interest it had never seen before. Effectively the policymakers changed the rules, left the ring and took the ropes with them as we entered a new era of personal responsibility in retirement.

But what difference has that made? Have people changed their plans as a result, and what does 'normal' for retirement income look like now?

Old Mutual Wealth has just released. with YouGov, its third detailed survey of how people in the UK are planning their income needs in retirement. What is becoming clear is that 'normal' looks nothing like it did before. People have adjusted and are operating according to a new normal.

In the new normal, people are reliant on multiple sources of income in retirement, including actively using their home, as more people anticipate downsizing to provide some income. 24 per cent of future retirees have said they would consider releasing value from their home in one way or another.

In the new normal, working beyond your state pension age is no longer seen as drudgery. With increasing longevity, the appeal of keeping busy with work has grown. Almost one-third of future retirees are expecting work to provide some of their income in retirement, with just under half suggesting one of the reasons for doing so would be to maintain social interaction.

The new normal means less binary decision-making. Each choice an individual makes along the way becomes critical, and the answers themselves are less obvious. How do you best invest your savings? Where is the best place for a rainy day fund? How do you want to take income in the future and what happens to your assets when you die?

 An abundance of choices to provide answers to the above questions is good, but too much choice can paralyse decision-making. The new normal requires a plan earlier in life.

All the while, policymakers have continued to give people plenty of things to think about. In the past 12 months alone, the previous chancellor deliberated over whether – and how – to cut pension tax relief for higher earners. The ‘pensions-ISA’ system was mooted as the culmination of a project to hand savers complete control over their retirement savings, while also providing a welcome boost to Treasury coffers in the short term.

During her time as pensions minister, Baroness Altmann voiced her support for the current system of taxing pension income, rather than contributions, indicating a split between the DWP and HM Treasury on the matter. Baroness Altmann’s replacement at the DWP is Richard Harrington. It remains to be seen how much influence he will have and on what side of the camp he sits regarding taxing pensions.

Meanwhile, Philip Hammond has entered the Treasury while our new Prime Minister calls for greater unity. Following a tumultuous time for pensions, a change in tone towards greater unity and cross-department collaboration would be very welcome.

In order for everyone to acclimatise properly to the new normal, the new chancellor should commit to a return to a longer-term, strategic approach to pensions policymaking, enabling all parties, from regulators and providers to customers, to make decisions with confidence that the landscape will not continue to shift as fundamentally as it has in recent times.

Steven Levin is CEO of investment platforms at Old Mutual Wealth.

To view all of Old Mutual Wealth’s retirement reports, visit: products-and-investments/ pensions/pensions2015/