Why Are British Salaries So Low?

The common perception that salaries in the United Kingdom are lower than those in some other developed nations reflects a complex economic reality. Many factors contribute to this, from macroeconomic conditions and labor market dynamics to government policies. This article explores the multifaceted reasons behind the UK’s wage landscape.

Underlying Economic Factors

Labor productivity, output generated per hour worked, drives wage growth. The UK has faced a “productivity puzzle,” with slower growth in output per hour compared to other major economies since the 2008-2009 financial crisis. Had pre-2007 trends continued, UK productivity would be an estimated 16% higher, limiting potential wage increases.

Business investment, especially in capital expenditure and research and development, directly impacts productivity. The UK consistently lags behind G7 peers in business investment as a percentage of gross domestic product (GDP). In 2022 and 2024, the UK recorded the lowest rates among G7 nations, a trend for 24 of the last 30 years. Lower investment constrains productivity improvements and the capacity for businesses to offer higher wages.

National economic growth, measured by GDP, provides capacity for wage increases. While the UK economy grew 0.3% in Q2 2025, its recovery since the pre-pandemic period has been slower than many G7 counterparts. UK GDP in Q2 2025 was 4.5% above its Q4 2019 level, trailing the Eurozone’s 6.0% and the United States’ 12.9% growth. This slower expansion limits wealth creation for higher wages.

High inflation erodes the real value of wages. When the cost of living rises rapidly, even modest nominal wage increases may decrease purchasing power, making salaries feel lower. For instance, median weekly pay for full-time employees in the UK in April 2024, adjusted for inflation, was 2% lower than in 2010.

Labor Market Dynamics

The UK economy’s shift from manufacturing to a service-dominated model influences average wage figures. While the service sector includes high-paying industries, it also encompasses many lower-wage roles in retail, hospitality, and care. This prevalence of lower-paying service jobs depresses overall average salary statistics. Productivity growth in the services sector has historically lagged behind manufacturing.

Mismatches between workforce skills and employer demands affect wage levels. The UK workforce faces chronic skills gaps; surveys in 2024 showed 80% of employers reported shortfalls, an 18-year high. This suggests the education and training system may not adequately prepare individuals for higher-paying roles, reducing workers’ leverage in wage negotiations.

Labor supply and demand conditions shape the wage environment. The UK unemployment rate was 4.7% in March to May 2025, an increase from the previous year. A robust labor supply relative to demand, especially in certain sectors, can reduce upward pressure on wages. Migration trends can influence this supply, impacting wage competition.

Employee bargaining power, often facilitated by trade unions, influences wage determination. The proportion of UK employees who are trade union members has steadily declined, from 32.4% in 1995 to 22.0% in 2024, the lowest on record. This decline and the shift towards individualized wage negotiations may have diminished workers’ collective ability to secure higher wages, impacting overall wage growth.

The growth of the gig economy and flexible work arrangements influences average salary figures. Millions of individuals are regular gig workers in the UK, representing a significant portion of the workforce. These roles often have lower pay and fewer benefits; for instance, the median annual income from gig work was as low as £375, with 87% earning less than £10,000 annually. More than half of gig workers earn below the National Minimum Wage, impacting overall average earnings and worker security.

Government Policy and Fiscal Environment

The structure of income tax and National Insurance contributions in the UK directly impacts take-home pay, influencing the perception of low earnings. For the 2024-2025 tax year, individuals in England, Wales, and Northern Ireland pay 20% income tax on earnings between £12,571 and £50,270, and 40% on earnings between £50,271 and £125,140. Employees also contribute 8% in National Insurance on earnings between £12,570 and £50,270 per year. This combined tax burden can make gross salaries feel significantly lower once deductions are applied.

As a major employer, government policies on public sector pay can indirectly influence private sector wage expectations and overall growth. Public sector employees have experienced lower pay increases and freezes since 2010. While public sector workers are set to receive pay increases of 4.75% to 6% in 2024/2025, average real public sector pay fell by 0.3% between December 2019 and November 2023, contrasting with a 2.3% increase in the private sector. These policies can set a benchmark for wage negotiations across the broader economy.

The National Living Wage (NLW) policy sets a statutory floor for earnings, impacting the lowest-paid workers. From April 2025, the NLW will increase to £12.21 per hour for individuals aged 21 and over. This policy has successfully raised wages for those at the bottom of the income distribution, but its broader effects on overall wage growth or productivity have been limited. It has not significantly translated into higher overall household incomes due to factors like benefit freezes and tapering.

Government investment in infrastructure, research and development, and education indirectly affects productivity and long-term wage growth. The UK’s lower levels of overall investment, including public investment, compared to other G7 nations constrain its capacity for future innovation and productivity gains. This lack of sustained investment can limit the economy’s ability to support higher-paying, higher-skilled jobs.