University of Bath

What a drag: the chilling impact of unemployment on real wages

An IPR Policy Brief examining the impact of unemployment on real wages.

Research conducted in 2012 by Professors Paul Gregg (University of Bath) and Stephen Machin (University College London) on behalf of the Resolution Foundation, has found that the stagnation in real wage growth in the UK labour market in the period from around 2003 appears to be substantially due to the increased sensitivity of real wages to unemployment. Indeed, they estimate that real wages were driven down by five per cent more than would have been the case had the same trend in the relationship between real wage growth and unemployment seen in the 1990s recessions, continued. This equates to around an extra £800 a year wage loss compared to what would have occurred in earlier decades. The findings suggest that a return to real pay growth will only be generated in periods when unemployment falls significantly. So that even in periods when unemployment is low but stable, wage growth will be muted.