Why Are Wages So Low in the UK? The Main Factors

The United Kingdom has experienced a period of subdued wage growth, impacting the financial well-being of its population. For many, earnings have not kept pace with rising living costs, reducing purchasing power and living standards. Understanding this phenomenon requires examining various contributing factors. This analysis explores the interplay of economic forces, labor market shifts, the national skills and productivity landscape, and government policies.

Macroeconomic Influences

Broader economic conditions significantly influence wage growth. Inflation has particularly eroded the purchasing power of earnings in the UK. While nominal wages increased by 5% to 6% between 2022 and 2024, inflation often outpaced these gains, peaking at 11.1% in October 2022. This led to a substantial cumulative real wage decline, estimated at 15% to 20% over two years. More recently, real wage growth has modestly outpaced inflation, with a 1.0% to 1.5% increase in real terms during March to May 2025.

The UK’s persistent low productivity growth also limits wage increases. Productivity, measured as output per hour worked, directly affects an employer’s capacity to offer higher pay without increasing prices. Since the 2008 global financial crisis, the UK has seen average annual productivity growth of merely 0.5% between 2010 and 2022, considerably lower than the historical average of 2% per year. This sluggish performance places the UK among the slowest in the G7, with 2023 productivity levels estimated at 20% below the United States.

Weak economic growth and low investment levels further constrain wages. The UK economy has grown slower since 2008, averaging 1.5% annually between 2009 and 2023, compared to 3.0% before 2007. This reduced expansion means fewer opportunities for businesses to increase revenue and raise wages. Investment expenditure in the UK, at 18% of GDP between 2017 and 2021, is the lowest among G7 nations, indicating a lack of capital deepening for future productivity and wage gains.

Global economic pressures also contribute to domestic wage dynamics. Spikes in international commodity prices, particularly for energy and food, have directly fueled UK inflation. External geopolitical factors, such as the conflict in Ukraine, contribute to rising import costs, leading to a “terms of trade” loss that dampens national income. These global shocks increase the cost of living, pressuring real wages even with nominal pay increases, as businesses face higher costs and consumers have reduced purchasing power.

Labor Market Characteristics

The evolving UK labor market structure significantly influences wage levels, notably with the rise of the gig economy. This model, characterized by short-term contracts or freelance work via digital platforms, offers flexibility but often comes with reduced pay and benefits. An estimated 1.7 million UK workers are in gig jobs weekly; for 71.5%, this is less than half their income. Around 52% of gig workers reportedly earn less than the national minimum wage.

The rise of gig work contributes to precarious employment, where work access is uncertain and income unpredictable. Examples include zero-hours contracts, providing no guaranteed minimum hours, leaving workers vulnerable to fluctuating income and short-notice cancellations. Around 6.1 million UK workers are in insecure work, with 3.4 million in low-paid insecure work. These roles frequently lack essential protections like sick pay and holiday pay.

Declining trade union density has weakened workers’ collective bargaining power, impacting their ability to negotiate for higher wages and conditions. Trade union membership among UK employees fell to 22.0% in 2024, the lowest rate since 1995. This reduction, particularly in the private sector, means fewer workers are covered by collective agreements that secure favorable pay increases and benefits. With less collective influence, individual workers find it harder to advocate for wage growth that keeps pace with inflation or productivity gains.

Employment patterns also show an increasing proportion of part-time and temporary work. Temporary workers accounted for 5.3% of all employees in January-March 2025, with many in these roles because they cannot find permanent positions. While some temporary roles offer flexibility, they often lead to lower average weekly earnings and less job security compared to full-time, permanent positions. This trend reflects a labor market where employers may prioritize flexibility over long-term workforce commitment.

The UK economy has seen a long-term shift in industry composition, moving from higher-paying manufacturing sectors towards lower-paying service sectors. Manufacturing, historically a significant contributor with higher wages, now accounts for a smaller share of employment. The service sector now dominates employment, with 80% of workers in the service industry by 2011. This structural change means a larger proportion of the workforce is concentrated in industries that typically offer lower wages, contributing to overall wage stagnation.

Skills and Productivity Landscape

A “skills mismatch,” where workforce skills don’t align with employer demands, directly impacts wage levels. A significant portion of the UK workforce, particularly graduates, are in roles that do not fully utilize their qualifications. Studies indicate 30% to 37% of UK graduates are overqualified for their jobs. This often results in a wage penalty, with overqualified workers earning less than those in roles better matched to their education and abilities.

Underemployment, where individuals work fewer hours than desired or in jobs below their skill level, is related to skills mismatch. In 2019, an estimated 2.5 million UK workers were underemployed, a figure that rose significantly since the 2008 economic downturn. This widespread underemployment wastes human capital, as skilled workers do not contribute their full potential. This limits their earning capacity and suppresses overall wage growth by increasing competition for suitable roles.

Slow adoption of new technologies across UK businesses hinders productivity and wage growth. Research shows reluctance to invest in digital technology has significantly cost the UK economy, with many businesses, particularly SMEs, lagging behind larger firms. For instance, only 35% of UK businesses fully utilize cloud-based solutions, and a mere 14% strategically implement artificial intelligence. This technological lag reduces efficiency and limits potential for higher output per worker, a prerequisite for sustained wage increases.

Insufficient investment in workforce training and development exacerbates the problem. Employer spending on training per employee has fallen by 19% to 26% since 2005, notably half the European Union average. This decline means fewer opportunities for workers to acquire or update skills. Without adequate training, the workforce struggles to adapt to new demands, leading to persistent skills gaps that constrain productivity and limit businesses’ capacity to offer higher wages.