Another year goes by and, yet again, any pay increase you’ve received was paltry at best. Your employer might have adjusted your wage based on inflation – if you’re lucky – or instead just gave you a little bit extra despite rocketing food and housing costs.
Either way, you’re left scratching your head as you ask a question, “Why are UK salaries so low”. Read on and you’ll discover some answers to a question that’s becoming increasingly important as we face a cost-of-living crisis.
Does the UK Really Have Low Salaries?
Sadly, the answer is yes, at least when compared to some other countries in Europe.
For over a decade, many articles have pointed out that UK pay is among the lowest on the continent. In 2014, HR Magazine highlighted that the UK ranked bottom of Europe’s 15 leading economies for pay. The situation hasn’t improved in the 10 years since.
The Big Issue points out that Luxembourg’s minimum wage of €14.14 per hour (approx. £12.08), is higher than the £10.42 that UK workers over 22 receive. According to Statista, the UK fell behind eight other countries for annual wages, despite consistently having one of the top five economies on the continent. If you’d decided to pack your bags and move to Iceland in 2022, you’d have been making an average of about $26,000 prox. £20,440) extra per year.
Of course, other factors come into play.
The cost-of-living influences some of these figures. For instance, LivingCost.org says the average cost of living for one person in Iceland is about 20% higher than in the UK. However, the difference between the two is $390 (approx. £306.50). Multiply £306.50 by 12 and you get £3,678 – still leaving you with an extra £16,762 in your pocket per year using our previous figures.
So why exactly are UK salaries so low?
Why UK Salaries Are So Low
There isn’t one single reason why UK salaries are so low. Instead, there are several factors at play, some related to fairly recent events while others are seemingly built into the UK’s salary system. But the major factor at play has been around for a little over a decade.
Factor 1 – Wage Stagnation
A March 2023 article published in The Guardian noted that the average person in the UK is £11,000 worse off – adjusted for inflation – than they should be. That’s according to an economic policy think tank named Resolution Foundation, which says that wage inflation after the 2008 Global Financial Crisis (GFC) hasn’t kept pace with the rates it had set before the GFC.
The article specifically compares German and UK wages. It says that in 2008, the gap between Germany and the UK was about £500. Not ideal. It means we’re still getting paid £500 less per year than Germans are for the same work. But in 2023, that wage gap had skyrocketed to eight times the size. It’s now £4,000.
The article also shares a handy graph, highlighting that wages have been on the decline almost since the turn of the millennium, with the five years before 2020 seeing them fall into the negatives before a slight rise over the last three or four years:
But what has caused this stagnation? The answers bring us to our next factors.
Factor 2 – Brexit
Regardless of your opinions on Brexit, there’s no denying that the 2016 referendum that resulted in the UK leaving the European Union (EU) was a tectonic shift in the country’s politics. In truth, we’re still trying to parcel out the economic effects of the decision to leave – not helped by the COVID-19 pandemic happening a few years later – but some data suggests Brexit may be behind low UK salaries.
The hit to the value of the pound played a role.
The pound depreciated massively in the wake of the Brexit referendum. Before the vote, the exchange rate between the pound and the Euro stood at 1.43, meaning you’d get €1.43 for every £1. Now, it’s 1.17 and has reached near parity several times since 2016.
That alone wouldn’t necessarily explain wage stagnation. However, the impact of this depreciation was felt by many UK firms – especially those trading with European countries – with that impact being passed on to employees. Goods bought from Europe started to cost more. Products sold to Europe generated less revenue. And, according to Pub Affairs Bruxelles, the result was that many businesses didn’t allow nominal wages to rise so that they could absorb the hit of a lower-value pound.
At least, that’s how it was supposed to work.
The data seems to suggest that UK exporters aren’t actually cutting their prices that much to make up for the decline of the pound, which brings us to our third factor.
Factor 3 – Possible Executive Profiteering
If companies that export goods to Europe out of the UK aren’t cutting their prices – and are raising them in some cases – why isn’t that money being passed on to you?
It seems that some level of executive greed is coming into play.
In August 2018 – two years after the Brexit referendum – Bloomberg ran an article pointing out that the gap between UK CEO and average worker pay jumped significantly. Those leading the country’s top 100 firms enjoyed a pay jump averaging 23% between 2016 and 2017, all while wages within those companies stagnated.
The situation doesn’t appear to have improved as we’ve entered the 2020s.
An August 2023 article in The Guardian points out that the UK’s top CEOs enjoyed a 16% bump in their pay during the previous year, taking CEO median pay up to £3.9 million per year. It was £3.4 million in 2021, meaning that CEO pay had risen by an average of £500,000 during 2022 – a year in which the average UK citizen was feeling the squeeze caused by higher household costs.
For the average person, wages didn’t increase by anywhere near as much. Statista says that October 2022 brought with it an average nominal pay increase of 6.1% – 10% lower than CEO pay rises. This percentage isn’t adjusted for inflation, which is what nominal means. Once inflation was taken into account, the average UK worker’s total pay declined by 2.7%.
Again, it’s wage stagnation – you could even argue wage decline – at play. The top executives in the country are making more money than ever before while the average person is having to struggle along with salary increases that aren’t tracking with inflation.
Factor 4 – The Tax Issue
As you know, a large portion of your wages go toward taxes, with the precise amount depending on your income. When compared to the rest of Europe, the UK is actually sitting fairly pretty in terms of how much of our wages we lose to tax. According to the Institute for Fiscal Studies, UK tax revenue stood at 32% of the country’s gross domestic product (GDP) in 2020. GDP is the monetary value of all goods and services made in a country over the year.
That means the UK pays lower taxes than much of Europe.
The average across the EU’s 14 most powerful economies was 39.9%, with the G7’s average being 36.3%. However, several major Western countries pay less. Australians paid 28.5% of their GDP toward taxes, with Americans paying a comparatively paltry 26.6%.
So, Brits are paying more in taxes than our U.S. counterparts. But what does that have to do with salaries?
It seems to come down to our public services. In the UK, many services are provided for “free.” The NHS is the most obvious example, with all UK citizens being eligible for free healthcare via that institution. However, the money for the NHS has to come from somewhere, which is where the tax issue comes into play. Those in the UK pay more taxes on their wages – and so take home less money – than those in the U.S. because our salaries are subsidizing the public services that we can use for free.
Whether this is a good or bad thing is a matter of opinion. However, it has an impact on take-home wages, which in turn impacts your ability to afford household bills and to afford the little luxuries in life.
Wrapping Up
Some of the factors that lead to low UK salaries can be explained away by the system we have. The taxes issue is a perfect example – we pay higher taxes because we benefit from the public services that receive that taxed money.
However, it’s also clear that widespread economic factors are also at play. Brexit appears to have harmed wages to some degree – not helped by executive profiteering – and many major businesses simply aren’t aligning their wage increases with inflation. The result is a form of stagnation, compounded by a relatively high tax rate, that results in UK salaries being lower than they probably should be.
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