Britain's workers have suffered more financial pain since 2008 than in any five-year period of the modern age, according to research by a leading tax thinktank that shows employees have sacrificed pay to keep their jobs.
Describing this downturn as the longest and deepest slump in a century, the Institute for Fiscal Studies says workers have suffered unprecedented pay cuts of 6% in real terms over the last five years.
Historically, real wages rise by about 2% a year. This suggests that people are more than 15% worse off than they would have been if the pre-crisis wage trends had continued.
Analysing downturns going back to the great depression, Paul Johnson, director of the IFS, said: "This time really does seem to be different … it has been deeper and longer than those of the 1990s, the 1980s and even the 1930s. It has seen household incomes and spending drop more and stay lower longer."
The report finds that since the start of the recession real wages have fallen by more than in any comparable five-year period. It also highlights an "unprecedented" drop in productivity as output has tumbled faster than employment.
Official figures on Tuesday brought little comfort for ministers looking for a manufacturing revival to turn the tide on productivity. Hopes that a pick-up in industry would lead to better balanced growth in the UK were dented by data for April showing the first decline in factory production in three months.
The Office for National Statistics said factories were producing 10% less than they were in 2007, before the onset of the recession in early 2008.
David Kern, chief economist at the British Chambers of Commerce, said: "Our manufacturing exporters are still overly focused on the weak eurozone, but low domestic demand has also limited progress."
The service sector was facing its own challenges from demand being sucked out of the economy by the squeeze on wages, economists warned.
"This period has seen the biggest squeeze of real pay in decades," said Michael Pearce, at Capital Economics. "We're not expecting this damage [to households' real pay] to be reversed any time soon, highlighting one reason not to get too carried away by recent signs of economic recovery."
The IFS says much of the sharp drop in pay is down to widespread nominal wage cuts for workers staying in the same jobs, rather than being driven by inflation outpacing pay growth or people losing high paid jobs and taking worse paid roles.
One-third of workers experienced nominal wage freezes or cuts between 2010 and 2011, and 70% experienced real wage cuts, the thinktank says, blaming in part a drop in the number of unionised workers.
The IFS said the silver lining was that employment had held up and so there was no repeat of the policy errors of the 1980s when millions were allowed to "leave the labour force altogether and receive disability benefits or lone-parent benefits, or move into early retirement".
Claire Crawford, programme director at the IFS said: "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.
"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."
A Treasury spokesman said: "As the IFS says, the UK is recovering from the 'longest and deepest' recession in a century. Despite this, the labour market has remained strong: one-and-a-quarter-million private sector jobs have been created and more people are in private sector employment than ever before."
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