How low wages are keeping unemployment down

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Many workers have seen their pay cut or frozen in recent years
Many workers have seen their pay cut or frozen in recent years Photo: Dominic Lipinski/PA Wire

Something curious is happening. Despite a sluggish economy for five years - in fact, the deepest and longest recession since the Second World War - unemployment is far lower than one might expect.

We thought this quirk might have run out of steam in recent months but, once again, the number of people out of work has dropped, down 5,000 between February and April. That's even better than the experts in the City expected.

New research also released today confirms what many suspected: wages have been kept very low, either just keeping pace with inflation or, for one in every three workers, actually staying fixed for several years, meaning that the spending power of that pay has been left behind.

I've written many times about the squeeze on households as inflation has pushed prices up, but the research by the Institute for Fiscal Studies' shows that this has been amplified by an unprecedented erosion of pay.

The good news is that this control on wages is at least part of the explanation for why unemployment is relatively low.

Companies, especially small firms, have been reluctant to fire staff even though there has been a drop in demand for what they produce and, conversely, staff have been reluctant to leave the workforce to go onto benefits.

Unemployment figures are lower than many would have expected Credit: Martin Rickett/PA Wire

ITV News has spoken to a number of small companies this week who have confirmed this picture. They have kept staff on while freezing or even cutting pay.

Employees haven't even brought up the topic of pay, apparently aware of the tough economic climate for their bosses.

One company director explained that it takes years to train staff to be useful at his plant nursery in Devon, so he has taken the hit on profits in order to keep his employees - but to make up for it, their pay hasn't risen with inflation.

Another at a garden centre in Hampshire described how she tries to keep morale up with vouchers on birthdays and at Christmas to make up for a pay freeze.

Although this unusual development has made life tougher for many households with lower incomes, it has meant that many people have been kept off the dole or disability benefits.

That is widely accepted as a good thing; it's better to keep people in work than to see them lose their skills and even the habit of work if they remain outside the workforce for long.

It suggests that when the recovery comes, the country may be primed to accelerate into growth more strongly than in the past.