Why Are UK Salaries So Low Compared to US? Exploring the Factors

Why Are UK Salaries So Much Lower Than US Salaries? A Historical and Economic Analysis

Salaries in the United Kingdom lag significantly behind those in the United States – on average, incomes in the US are a third higher than comparable roles in the UK. As illustrated in Figure 1 below, this substantial gap has existed for over two decades, with US incomes consistently outpacing British pay.

Figure 1: Average Annual Salary in USD for United States vs United Kingdom

This analysis will examine the complex historical origins and evolving economic, political, social, and educational factors that have converged to depress wages in the UK relative to America.

Post-World War II Boom and Bust Cycles Set the Stage
In the aftermath of World War II, the United Kingdom experienced an economic boom from the late 1940s through 1960s with major industries like coal, steel, textiles and car manufacturing thriving. However, the government also expanded social welfare programs substantially during this time period, introducing the National Health Service and nationalizing key industries.

While this stimulated the economy, it also led to increased government spending and higher taxes which would constrain salaries later on. By the 1970s, the UK economy took a turn for the worse as growth stalled and inflation dramatically accelerated, as shown in Figure 2.

Figure 2: United Kingdom Inflation Rate 1950-1980

Union demands for higher pay to match rapidly rising prices despite low productivity growth set the stage for future government efforts to restrain salaries.

Thatcherism: Lower Taxes But Also Less Government Support
When Margaret Thatcher came to power in 1979, she ushered in a series of economic reforms known as Thatcherism centered around free market policies, privatization, and reduced government spending and taxation. By 1986 the top rate of income tax had dropped from 83% down to 60%.

While this neoliberal agenda succeeded in generating economic growth in the 1980s and beyond, critics suggest it contributed to wage stagnation and increased inequality. As illustrated in Figure 3, while tax rates fell for top earners, boosting take home pay, government spending on housing, unemployment and other social benefits also declined:

Figure 3: UK Government Social Spending as % of GDP 1960-1990

The weakening power of trade unions under Thatcher also reduced collective bargaining capabilities for higher salaries. Today, less than 25% of UK workers are part of a union, compared to over 50% in 1979.

Brexit Adds Another Blow of Uncertainty
The shock 2016 vote for the UK to leave the European Union created tremendous economic uncertainty leading to a decline in investment and slower growth. Three years on, the Centre for Economic Performance estimated that by the end of 2019:

• UK economy was already 2.5% smaller than it would have been without Brexit
• Business investment was 11% lower
• Average household had lost £850 in real earnings due to reduced economic activity

Until the exact new trade relationship with the EU becomes clear, companies are likely to remain wary of major investments or salary increases. And with lower output comes downward pressure on wages across the whole economy over time.

Chronic Productivity Shortfall Hinders Wage Growth
Since 2007, productivity growth in the UK has consistently lagged behind other advanced economies like France, Germany and especially the US, as shown in Figure 4.

Figure 4: Productivity Growth 2007-2018

This ongoing "productivity puzzle" directly dampens wage growth in the long run, since company revenues and profits suffer, restricting raises. Economists point to many possible causes, including inadequate management and business investment, lack of workforce skills, and difficulties adopting new technologies. But regardless of origin, solving the productivity gap is essential for incomes to rise substantially.

Globalization and Decline of UK Manufacturing
Like the US, the UK’s economy has transitioned away from high paid manufacturing jobs toward lower paid service sector roles over the past few decades. However the decline has been more extreme.

Whereas manufacturing still represents 12% of US GDP with 7% of workers, in the UK it has shrunk to just 9% of GDP employing only 3% of the working population. Figure 5 shows how UK manufacturing jobs have declined continually:

Figure 5: UK Manufacturing Jobs 1960-2020

Acceleration of offshoring production to developing countries with far lower wages eliminated many middle income British factory jobs. Iconic brands like Leyland, British Steel and ICI Pharmaceuticals either disappeared or were bought out by overseas competitors.

Cultural Differences: Less Emphasis on Long Hours
Unlike the US where working 50-60 hours per week is commonplace for professionals and managers, the culture in UK workplaces places higher value on work-life balance and shorter hours. Brits are entitled to 28 vacation days per year – over a third more than typical US allowances.

While this cultural difference contributes to higher reported wellbeing, it likely depresses British wages relative to total hours worked compared to Americans who pull long hours at the office. With less time invested at work, fewer opportunities arise for promotions and salary increases.

More Social Benefits But Higher Taxes
The UK operates an expansive social welfare system that many Americans would scarcely recognize. Costs are high but so too are benefits in areas like healthcare, unemployment, housing and pensions.

Healthcare is the prime example – delivered through the taxpayer funded National Health Service, the system provides comprehensive free coverage for all residents. Compare this to the predominantly privatized model in the US where care costs are staggeringly high for those without generous insurance.

In 2018, the UK spent an average of $4,000 per person on healthcare through taxes versus over $11,000 per person in the US. However, 9% of Americans remain completely uninsured with little or no access to care.

The flipside of paying for these programs is higher tax rates, including a top income bracket of 45% versus 37% in America. And more dollars from every paycheck funding public services means less cash in hand for workers.

Education: Academic Focus Over Practical Skills
While higher education standards are broadly similar between the US and UK, subtle differences in focus have implications for graduates’ earning potential.

The UK system places greater emphasis on academic learning and personal enrichment. By contrast, the privatized and very expensive American system incentivizes students to select degrees delivering practical skills well aligned with expected earnings to pay off exorbitant loans.

With over 75% of UK students still benefiting from public funding, they escape pressure to treat university specifically as career training. This cultural contrast can lead to lower starting pay for British graduates in fields like business, technology and engineering.

Decline of Private Sector Unions Reduces Bargaining Power
Trade unions represented over 13 million British workers in 1979, wielding substantial collective bargaining power to negotiate better pay and conditions. But after laws under Margaret Thatcher reduced their influence and ability to strike, membership plunged.

Today fewer than 6.2 million UK employees are union members. And in the private sector the proportions are even lower at just 13.4% of workers versus 47% across the public sector. This decline in union penetration over 40 years has meant weaker salary negotiation capabilities for many British staff compared to American counterparts.

Rising CEO Salaries Highlight Inequality Divergence
While average UK salaries may trail the US substantially, at the very top end, chief executives have enjoyed strong pay growth in recent decades. As shown in Figure 6, average CEO pay has risen much faster than overall wages:

Figure 6: CEO vs Average UK Salary Growth 2000-2020

Such trends have been more pronounced in Britain versus America, with the UK having a larger productivity-adjusted pay gap between highest and lowest earners. This points to rising inequality as a significant challenge.

Overdependence on Financial Services and London
While the US economy is relatively well diversified across industries including technology, healthcare, oil and gas and consumer markets, the UK has become disproportionately dependent on financial and business services concentrated in London.

This sector generates huge tax receipts but also rampant inequality. It has crowded out investment in other industries important for economic stability and rising wages. Many economists argue that overreliance on “The City” exposes the UK to risk, evidenced by the deep post-2008 crash which saw average incomes decline by over 10% in real terms.

Conclusion: No Simple Answer But Plenty of Insights
As this robust historical, economic and statistical analysis reveals, there is no single driver behind the substantial gap between salaries in the UK versus the US.

Rather it is the interaction of political shocks like Brexit with legacy social policies, cultural values, education strategy and industrial structures unique to each country combining to suppress British wages over decades.

While the complex causes may defy simple explanation, hopefully the insights within this detailed comparative study provide context to understand the roots and magnitude of the UK’s enduring salary lag.