Time for new policiesĪt present, central banks in the UK and other countries are fighting inflation by raising interest rates and reversing the “money creation” that they were doing under quantitative easing.
Indeed, before any lags are realised, the prospect of wage inflation catching up with headline inflation may be stifled by unemployment rising in response to the economy contracting. This argument has been put by the Bank of England Governor Andrew Bailey, leading him to call for wage restraint.īut while the possibility of above-inflation wage rises cannot be ruled out, it seems far-fetched to think that workers – in all sectors and regions – will be able to assert their power in ways that protect their real wages. While wage inflation may not be rising by as much price inflation now, in the coming months, some argue it will begin to rise and perhaps even overtake price inflation. This matters because it implies that workers’ bargaining power may be less than what the headline measures of unemployment suggest. The fact that there has been a recent rise in economic inactivity, with workers (particularly older ones) exiting the labour force, also suggests some hidden unemployment. While recorded unemployment has fallen, the actual level of unemployment is higher: workers on incapacity benefits – in relatively large numbers in particular areas such as Wales and Scotland – would be in work if suitable jobs were available, but are not counted in the official unemployment statistics. Second, there are other measures of unemployment. The increase in market power of firms also helps to explain why profits have risen: they’re up around 60% in real terms in 20 years, compared to growth in workers’ real wages of about 14%. They face bargaining at an individual level, and the best way to get higher pay is often to find a new job. Unlike the 1970s, British workers are not able to collectively demand and secure pay rises via union organisation.
KEEP IT UP HOW TO
It is not entirely clear how to explain this, but several factors are potentially important.įirst, there is the decline of union power together with the rise in firm power.
The fact that this is all they have achieved in a period of low unemployment is something of a paradox. Growth in pay, inflation and unemployment (%) Lower real living standards now represent the price of being in paid work and the cost of an economy that is jobs-rich. This is despite the fact that unemployment is low. As a challenge to economic theory, workers are facing cuts in their real pay with seemingly no prospect of wages catching up with headline inflation. This way of thinking gained support from the experience of the 1970s, when higher prices and higher wages coexisted, leading to a period of stagflation.īut the present shows us how price inflation and wage inflation can be decoupled. The textbooks also refer to the possibility of wage-price spirals, where higher prices fuel higher wages. Its resolution calls for a rethinking of policies towards inflation and indeed the economy more generally.Įconomics textbooks teach us that lower unemployment is the cause of higher wage inflation – the negative relationship between unemployment and wage growth forms the basis of the so-called Phillips curve. For them, the cost of living crisis is not some hackneyed political slogan but a fact of life. More than a fifth of workers are struggling to afford the things they need to live. You can listen to more articles from The Conversation, narrated by Noa, here. But for the majority of workers, higher price inflation is now eroding the real value of what they earn. A few workers in high-paid jobs have enjoyed higher bonuses and inflation-busting pay rises – it has just been reported that CEO pay has recovered to pre-pandemic levels for instance. There has been a huge amount of concern about rising inflation in recent months, and it’s made worse by the fact that wage inflation has not been keeping up.
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