International Labour Organisation finds in three years to 2013 UK wages fared worse than most of the eurozone’s crisis hit economies

British workers suffered the biggest drop in real wages of all major G20 countries in the three years to 2013, according to the International Labour Organisation (ILO).

Labour said the report underlined why the government has been unable to get the deficit down. Chris Leslie the shadow Treasury chief secretary said: “Not only are working people worse off under the Tories, we’re also doing worse than all other G20 economies. On average working people are now £1600 a year worse off since 2010.

“As the Autumn Statement showed, and these figures help confirm, the continuing squeeze on living standards is leading to a shortfall in tax revenues. And this is a key reason why George Osborne has broken his promise to balance the books.”

The ILO report reveals that wages in the UK have fallen more than in Italy. The biggest fall in UK wages adjusted for inflation came in 2011, when they fell by 3.5%. In Italy, which was one of the countries hit hardest by the eurozone crisis, real pay fell by “only” 1.9%.

This despite the fact that Italy’s economy has been shrinking for three consecutive years now, and unemployment recently hit a record high of 13.2%.

To further emphasise the severity of the drop in real pay in the UK, British workers have been squeezed more than in the eurozone economies hardest hit by the recession – Portugal, Spain and Ireland – apart from Greece.

According to recent data released by the Office for National Statistics (ONS), wages in the UK fell 1.6% this year compared to 2013, marking a sixth straight year of declining levels of pay.

The Bank of England said in its latest quarterly inflation report last month that recent employment growth had been concentrated among young, lower-skilled and lower-paid workers, which was probably dragging down average wage growth. The fall in pay, while acutest among lower skilled workers, has been registered in most parts of the labour market.

Wage growth being higher in the “All employees” category is down to what is known as a “composition effect”. Explanation around figure 8 here.

The ILO notes in its report that weak productivity is a key part of the story in the UK.

The paradox is that unlike the economies of Italy, Spain, Portugal and Greece, the UK has been growing, employment levels are just shy of all an time high, and the unemployment rate has dropped to 6%.

More people are working, but are poorly paid and are earning less

Low wages are not just an issue of fairness, but are critical in tackling the nation’s finances

On Wednesday George Osborne confirmed what everybody already knew. The chancellor missed his most prized target: eliminating the deficit in this parliament. Instead, the deficit stands at around 5% of GDP and more than £90bn will be borrowed by the government this year.

Intuitively one would expect that with a growing economy and such high employment the government’s tax receipts would be increasing at a pace with the labour market. Yet, because of the fall in wages, forecasts for income tax receipts have been spectacularly missed.

Weaker-than-expected pay growth in Britain has generated lower than expected tax revenues for the government, which in turn has slowed deficit reduction.

UK gender pay gap shrinking, but still high

Recent ONS figures found that the gender gap in the UK had shrunk to a record low. The ILO research though shows that the difference in pay between men and women in the UK is still much higher than in many other developed economies.

The ILO have picked out certain labour market characteristics that explain why there is a split between what men and women earn, such as education, experience and location. Meanwhile, there are several factors that cannot be explained, primarily linked to discrimination. By adjusting to eliminate the effect of the characteristics that can be explained, the ILO’s calculations show that the gap would be eliminated in the many of the economies analysed.

In Britain’s case, the gap would indeed drop, but it would still remain among the highest among the countries featured in the ILO study.

The ILO’s global wage report shows that wage growth around the world is being driven by emerging economies

Patrick Belser, senior economist at ILO and author of the report, said: “In developed economies, wages have been flat over the last two years. The consequence of that has been slow growth and household consumption. In some countries, like the UK, Italy and Japan, average wages are still below the level where they were before the financial crisis in 2007”

“On the other hand, if you live in an emerging economy, you have probably seen your pay rise, this is particularly the case if you live in China,” said Belser.

Real wages in China were growing at a rate faster then 10% a year through to 2009, before slowing slightly. Real-pay growth in the world’s second-largest economy was 9% in 2012 and 7.3% last year.

Belser said although US workers earn three times as much as Chinese workers, the gap is getting smaller.

The Geneva-based ILO said between the early 1980s and the financial crisis, rising inequality had been “particularly stark” in the UK and the US.

Belser said discrimination in the global jobs market remained a problem. “Our report shows that women, migrant workers and workers from other disadvantaged groups frequently earn much less than others, even when they are equally qualified or when they work in the same occupations.”