Modern economies are supposed to deliver improving living standards – incrementally year-on-year, with big gains decade-on-decade. That is why it is so shocking that a 30-year-old today earns no more than a 30-year-old a decade ago did, according to previous research by the Resolution Foundation’s Intergenerational Commission.
This is an earnings freeze on a scale unprecedented in the UK since the war. The crash of 2008 is key but that is not the whole story. New Resolution Foundation research published this week helps to explain how jobs and earnings have been affected since then.
The good news is that unemployment did not rise as much as feared, and that since 2012 the UK has enjoyed a jobs boom that has delivered record employment. One reason is that pay adjusted itself by much more than we expected. After the crash, the unemployment rate for those aged 18-29 rose by four percentage points while their real earnings fell by nine percentage points. This is a much lower impact on employment and a much bigger effect on wages than in previous recessions.
Many of us would see this as one of the benefits of a flexible labour market, ensuring that the pain of adjusting to the recession was spread broadly through our wages, rather than being more narrowly focused on people losing their jobs. In the 1980s, by contrast, unemployment was much higher but wages stayed higher too. The politics of this shared pain is very different from the economics, however. Back in the 1980s, the incumbent government won two landslide election victories. Now both parties are feeling the wrath of an electorate fed up with the squeeze.
We can dig deeper into these effects on pay and jobs by comparing the employment rates four years after leaving education for groups who entered the jobs market in 2002 and 2008. We find that the employment rates of those educated only to GCSE level fell from 68 per cent in 2002 to 56 per cent in 2008, while graduate employment rates only fell from 91 per cent to 88 per cent. So the unemployment effects of the recession were felt almost entirely among the lowest qualified. Yet the opposite is true of pay. Graduates faced a 10 per cent earnings fall, compared with a 1 per cent drop among lower-qualified young workers.
It looks as if graduates responded to the crash by trading down into less-well-paid jobs. They, in turn, displaced the less skilled workers, who were more likely to be unemployed. But down at the bottom end, the minimum wage meant that pay fell by less.
Our research shows that the crisis cohort of graduates had a 30 per cent higher chance of being in a lower paying occupation one year after graduating, a scarring effect lasting seven years that could still have a significant influence on their pay and career prospects. This is the effect of the crash – there was no sudden increase in the number of graduates that could possibly offer an alternative explanation of this result.
Our new research adds to a growing shared understanding of the effects of the last downturn, and it raises lots of policy questions. One is how we can encourage young people to move jobs more frequently, particularly from low-paid to higher-paying occupations. We also need to think about how we can mitigate any negative effects for those young people unfortunate enough to leave education in the next downturn.
But there are also plenty of wrong conclusions to draw about what is happening to graduate pay. The latest data from the longitudinal education outcomes (LEO) appear to show graduate earnings doing badly. But while these data are very useful, they start in 2009, the worst year in living memory to enter the world of work. We can now see that a key reason graduate pay has underperformed over the past decade is the way that the UK’s labour market responded to the recession, with the pay effects focused on graduates and the unemployment effects focused on the least educated. Yet this crucial double impact is hidden if the only comparisons we make are on pay between graduates and non-graduates who are in work, because it ignores that differential employment effect.
Some people argue that the LEO data show that too many people are going to university. Actually, they show how a flexible labour market responds to a recession. This misinterpretation matters.
When we look at the long-term factors behind the slowdown of earnings growth, a key one is that the rate of increase in educational attainment has slowed too. What the UK needs, therefore, is more education opportunities for more people. It would be a tragic mistake to draw the opposite lesson from the recent recession and make the next one even more damaging than it need be.
David Willetts is chair of the Resolution Foundation.