The weirdest recession of all

Economic experts bedevilled by the riddle of falling inequality and unexpectedly positive unemployment think they are finally cracking the code of the double-dip recession.

Researchers at the Institute for Fiscal Studies (IFS) believe the drop in real wages seen over the course of the downturn – bigger than that seen in any comparable five-year period – is behind the confusion.

Employment has fallen less than output, leading to a 'productivity puzzle' which has left economists scratching their heads.

Those trends were reinforced by today's figures from the Office for National Statistics (ONS). Unemployment was broadly stable at 7.8%, but total pay growth excluding bonuses stood at 0.9%.

"Total pay growth is still lagging way behind consumer price inflation, so in real terms wages are falling," the ONS said.

The answer could be that smaller firms have been suffering from falling productivity, perhaps because of reduced investment, the IFS suggests.

Poorly paid employees may also be a factor. Larger companies have laid off staff but smaller firms have kept them on and imposed real-terms pay freezes or even wage cuts – a fate suffered by one-third of workers between 2010 and 2011.

The lack of unionised labour in the current downturn will have contributed to this, while the crackdown on benefit claimants may have persuaded more to settle for poorer working conditions.

"The falls in nominal wages that workers have experienced during this recession are unprecedented, and seem to provide at least a partial explanation for why unemployment has risen less – and productivity has fallen more – than might otherwise have been expected," Claire Crawford, programme director at IFS, said.

"To the extent that it is better for individuals to stay in work, albeit with lower wages, than to become unemployed, the long-term consequences of this recession in terms of labour market performance may be less severe than following the high unemployment recessions of the 1980s and 1990s."

Falling wages were not matched by a decline in welfare spending in the first years of the recovery, meaning inequality has fallen over the recession.

"The scale of the fall in average incomes is greater and more consistent than that seen in the recessions of the 1980s and 1990s," the IFS' Paul Johnson wrote.

"The fact that income growth was relatively limited during the 2000s also means that the income losses since 2008 have returned average incomes close to those at the turn of the century – a reverse which is again unprecedented."

Significant cuts to the welfare budget and a return in earnings growth are likely to end the inequality improvement by 2017, however.

The impact of tougher labour market conditions not reflected in the unemployment figures is being made worse by the rising cost of living, SDLP MP Margaret Ritchie told

She has tabled a Commons motion warning that the rising cost of energy, petrol and food is putting strain on many households.

Average household costs have risen four times faster than average pay over the last five years, her early day motion warns. It notes that fuel prices are up 30% in the last three years.

"The higher cost of living and its impact has been more pernicious in the last six to eight months," Ritchie said.

"If you go to your local supermarket or your independent retailer, the price of foodstuffs has gone up. But also if you want to maintain a car on a road – and for those in my rural constituency, lack of public transport means you have to – it's also more expensive."

The IFS' Paul Johnson concluded that the makeup of the coalition's "fiscal squeeze" has "not been especially growth enhancing".

Ritchie went further, suggesting that welfare reforms and the government's broader spending cuts agenda were hitting ordinary people.

"I think they have to stop using the ordinary man and woman on the street as part of their deficit reduction measures," she said.