Developing nations to make ground on UK wages by 2040

19 February 2019 Consultancy.uk

Wages in the UK are set to rise by nearly $1,000 per month by 2040, according to new research. Developing markets will also see a steep rise in monthly salaries in the next 20 years, but a marked difference will remain between UK workers and those in China or India, among others.

At best, the last decade saw UK salaries stagnate, with the majority of the country’s workforce seeing their pay shrink in real terms since the crisis. More often than not, the last 12 years have seen wages outstripped by inflation, meaning that on the rare occasions wages have outpaced the price of living, it has been celebrated as a decade-long ‘high’.

In September 2018, it was revealed that pay rose by 3.1% in the three months to August, compared with a year ago, while inflation for the same period was 2.5%. While the Office for National Statistics’ release did indeed show that wages excluding bonuses had risen at their fastest pace in nearly 10 years, the average pace of wage growth was 4% before the global financial crisis.

The financial crisis has had a lasting impact on the UK economy and people’s incomes, with the Institute for Fiscal Studies having found that annual wages are still £760 lower than they were a decade ago. The institute’s analysis, released in the same month as the ONS’ figures, found that median annual earnings had fallen to £23,327, 3.2% lower than in 2008 when the average wage was £24,088. This is a far cry from the “new dawn” for wage growth which Bank of England chief economist Andy Haldane said the ONS’ data heralded.

Average wage per month (in constant 2017 $)

While UK wages have stagnated, however, developing economies have gained significant ground in terms of their average salaries. According to a new study by Big Four firm PwC, they are set to move even closer to being in alignment within the next 20 years – as India, China and Malaysia in particular enjoy accelerated wage growth – while British workers can expect a slower rate of growth again.

A combination of real exchange rate appreciation and productivity growth might see India realise the world’s fastest rates of real wage growth, according to PwC, outpacing similar economies to see wages more than triple by 2040. Malaysia will similarly see a meteoric rise in wages, while China’s average real term pay is likely to at least double in the next two decades.

Even so, there will still be a significant gap between UK wages and those figures. The average UK salary in 2040 will be pushing the equivalent of $4,000, but this is only a few hundred dollars more than they receive now. According to PwC, at the current rate of exchange, UK workers receive just under $3,000 a month, and this will increase by less than $1,000, in stark contrast to the increasingly hefty wage packets of Chinese and Malaysian employees in particular.

One of the impacts of this is that businesses will have to consider the future of their outsourcing policies in the next 20 years. Many firms employ the strategy as avoiding the pay and conditions demands of more empowered European workers, as well as a string of regulations which see them pay sick pay and contribute to pensions. With the wages of the economies companies usually send this work to steadily ramping up, the effectiveness of the tactic will become less and less apparent.

By 2040, our projections suggest that the wage difference between the UK and emerging markets will have narrowed

More importantly, however, movements in wages have a two-sided impact on economies. Higher wages mean higher costs for firms, but they also boost the purchasing power of workers and so stimulate consumer spending. Growth in real wages is an especially important measure of changing production costs for businesses and living standards for workers. For example, in a year where nominal wages increase by 5% but consumer price inflation is 6%, businesses will benefit from relatively cheaper labour costs, but living standards for their employees will deteriorate as prices rise faster than wages.

This can be seen with the UK’s floundering retail segment, the nation’s sustained food and drink crunch, and the tumbling sales figures of the British automotive industry: each could be said to be enduring the painful legacy of a decade of stagnant wages, even if pay is now finally on the rise. With a decrease in wages, companies might enjoy a short-term boost to profitability with their lower spending levels, but in the long-term, they will see their sales impacted as consumer spending power tanks. As a result, businesses in the UK now face a key question on how far this narrowing will continue, and what that implies for their business strategy.

According to PwC, the rapid wage growth in India will, meanwhile, likely see it witness economic growth of 7.6% in 2019, whereas the UK will settle at 1.6% if the country manages to reach a deal on Brexit in March. As a result, the UK, which was estimated to be the fifth largest economy in the world in 2018 by the IMF, is anticipated to move down to seventh place in the rankings, behind India and France.

Related: Emerging markets could surpass G7 by 2030.

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