Pay and Productivity: Both Due for a Raise in the UK

Pay is of vital importance to most people in this country, productivity holds the key to our long-term prosperity.

So two vital questions. Will this be the year when real wages finally start rising again after a prolonged squeeze? And, closely related, is this when productivity shrugs off its post-crisis stagnation and starts growing?

The question of whether 2014 is the year of the real wage rise is a big one, economically and politically. On the most straightforward measure used by the Office for National Statistics (ONS), average weekly earnings adjusted for the consumer prices index, real wages began falling on annual basis in 2008, and they have not stopped falling yet.

This is highly unusual. The ONS has good data stretching back to 1964 and comparisons well back into the 19th century. A long run of falling real wages is rare and the cumulative scale of it, 6% or more, breaks all modern precedents.

The good news, to judge by a Resolution Foundation event I spoke at a few days ago, is that the squeeze may be over and we should see modest real wage growth this year. Before coming on to that, let me address one of the puzzles in the real wage story of falling real wages which has bothered me for some time.

This piece is cross-posted from EconomicsUK with permission.