Wages: why don’t they keep up with inflation? | Kiowa County Press

david spencer, University of Leeds

Rising inflation has been a huge concern over the past few months, and this has been compounded by the fact that wage inflation has not kept pace. some workers in high-paying jobs have benefited from higher bonuses and anti-inflationary wage increases – it has just been reported that CEO compensation has returned to pre-pandemic levels, for example. But for the majority of workersrising prices now erode the real value of what they earn.

More than a fifth of workers struggle to pay for things they need to live. For them, the cost of living crisis is not a hackneyed political slogan but a reality. This rhymes with real difficulties. Its resolution calls for a rethinking of policies towards inflation and even the economy in general.

Economics 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 what is known as Phillips Curve. The textbooks also refer to the possibility of wage-price spirals, where higher prices fuel higher wages. This way of thinking was reinforced by the experience of the 1970s, when higher prices and higher wages co-existed, leading to a period of stagflation.

But the present shows us how price inflation and wage inflation can be decoupled. As a challenge to economic theory, workers face cuts in their real wages with seemingly no prospect of wages catching up with headline inflation. This despite the fact that unemployment is low. The decline in the real standard of living now represents the price of paid work and the cost of a job-rich economy.

Wage growth, inflation and unemployment (%)

Regular pay is net of things like overtime, bonuses, and benefits; CPI = consumer price inflation. NSO

Why the low wage inflation?

Wages have actually been in the doldrums since the global financial crisis of 2007-08. Real wages fell in the years immediately following this crisis, and while they were able to recover thanks to very low inflation from 2012, they only returned to 2008 levels very recently.

Chart showing real wages in the UK
The Y axis represents real average weekly earnings (PS). IbisWorld

The fact that this is all they achieved in a period of low unemployment is paradoxical. It’s not entirely clear how to explain this, but several factors are potentially important.

First, there is the decline of union power with the rise of corporate power. Unlike in the 1970s, British workers are unable to collectively demand and obtain wage increases through union organisation. They face negotiations at the individual level, and the best way to get a higher salary is often to find a new job. The increase in corporate market power also helps to explain why profits increased: they are up about 60% in real terms over 20 years, compared to real worker wage growth of around 14%.

Second, there are other measures of unemployment. While registered unemployment has fallen, the actual level unemployment rate is higher: workers on incapacity benefit – relatively large numbers in particular regions such as Wales and Scotland – would be employed if suitable jobs were available, but are not counted in official unemployment statistics.

The fact that there has been a recent increase in economic inactivityworkers (particularly older ones) exiting the labor force, also suggest hidden unemployment. This matters because it implies that the bargaining power of workers may be lower than aggregate measures of unemployment suggest.

Third, there is the role of delays. Although wage inflation may not be rising as much as price inflation currently, in the coming months some say it will start to rise and possibly even outpace price inflation. This argument was made by the Governor of the Bank of England, Andrew Bailey, leading him to claim wage moderation.

But while the possibility of wage increases above inflation cannot be ruled out, it seems a stretch to think that workers – in all sectors and all regions – will be able to assert their power in ways that protect their real wages. Indeed, before any lag materializes, the prospect of wage inflation catching up with headline inflation may be stifled by rising unemployment in response to the saving contract.

The time for new policies

Right now central banks in the UK and other countries are fighting inflation by raising interest rates and reversing the “money creation” they were doing under quantitative easing. . Inflation forecast by the Bank of England to peak at around 10% in the coming months, this political approach seems less and less convincing. On the contrary, new policies are needed to ensure wages catch up with headline inflation, especially if workers are not to suffer economic harm.

This is a welcome measure that the government is offering (belatedly) direct financial support to the poorest in society to help them cope with soaring energy bills. While the government announced some time ago that it planned to raise corporation tax from 19% to 25% for most businesses from 2023, it has only just decided to impose a one-off tax on oil and gas companies to help pay for this support, after previously resisting pressure to do so. The broader lesson of this reversal is that the state has a responsibility to protect the economically disadvantaged, and that includes redistributing income in this way.

oil rig in the north sea
The government aims to raise PS5 billion with an exceptional tax on oil and gas companies. Mr. PK

Yet it is concerning that support payments are on time. Will the government offer new cash transfers in the future if energy prices continue to rise? His fiscal conservative instincts are likely to prevent this from happening.

In any event, alimony does not contribute to raising wage inflation to levels corresponding to overall inflation. This would be easier to achieve if workers had greater bargaining power.

Restoring workers’ bargaining power requires sweeping reforms. This means rethinking corporate governance structures and giving workers a greater say in business. It also involves building union power and expanding forms of public and worker ownership.

Only until we address the power imbalances that entrench low real wages will we ensure an economy that is sustainable and managed in the interests of all, not just the few.

The conversation

david spencerprofessor of economics and political economy, University of Leeds

This article is republished from The conversation under Creative Commons license. Read it original article.

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