Quarsh Blog

Is This The End of Peak Pay?

Every generation over the past century has seen their pay increase compared to their predecessor; i.e. at the same age the average employee has earned more than their parents’ generation did for the same role. This has been caused by a steady increase in salaries above the rate of inflation. But now for the first time, this isn’t happening.

According to research by the think-tank Resolution Foundation, and reported in the Daily Telegraph (‘Young, Savvy and Poor’ - 9 Feb 2017), male Millennials, those born in the Eighties and Nineties, are being paid less between the ages of 22 and 30 than their predecessors, and women in the same age bracket have seen their salaries stagnate.

There are a number of possible reasons; they're entering the workforce during a major global recession setting their careers back several years, the expansion of the number of degree qualified candidates creating a glut of candidates, even the cultural shift by Millennials away from conventional career structures. The possible reasons are interesting, but the impact is concerning.

The consistent and predictable rise in earnings has been a key engine for growth in the UK for over a century. It has been instrumental in the development of the consumer society, just as it has been in the US and every other developed nation. Sure the cost of consumer goods has gone down, but at the same time, the proportion of the average pay packet able to be devoted to things other than housing and food has increased.

According to the Office of National Statistics, in 1950 the average household spent 33% of its income on food and drink, in 2006 that figure was around 10%. As the National Consumer Council said at the time, it ‘simply reflected the strong economic growth and rising incomes the country had enjoyed over 50 years.’ But to be clear, that requires rising income above inflation, without it every extra pound you earn is lost by the increasing cost of the goods you buy.

We are addicted to stuff, to material possessions and their cheap availability. We all want the latest new gadgets, fashions and trends, but what if the cost begins to outpace our earning potential? The latest iPhone 8 is rumoured to likely cost over $1,000 per handset, which anyone used to how Apple prices its beautiful and oh so desirable products will recognise is likely to translate to close to £1,000 in the UK market. When the first iPhone came out in 2007 it cost $499. That’s a 100% increase in 10 years. In 2007, according to the Institute for Fiscal Studies, the average UK family earned £30,700, this peaked in 2010 at around £31,000, a figure it would not reach again until 2015 and which it has remained close to since.

So income has been static, but the price for the archetypal desirable gadget has doubled. Then you factor in the figures on Millennial income and find them heading the other way, the average UK figures being propped up by buoyant increases for Generation X. And so the interesting question becomes, have we passed peak real income, and if so, is the slope ahead for the Millennial generation downhill rather than the uphill we’ve come to expect?