RUTH SUTHERLAND: Higher pay should only follow stronger growth… The risk is that these salary increases are not sustainable and will soon be feeding into inflation
Who doesn’t love a pay rise? On the face of it, the fact that wages and salaries have risen by 7.8 per cent – the highest since records began almost a generation ago – looks like good news.
A hefty increase may seem a welcome relief to families grappling with big increases in food and energy bills.
The problem, however, is that in many cases the pay hikes are hollow, because they are not based on solid gains in productivity. Instead, they have been awarded by employers desperate to recruit and hang on to staff in the aftermath of the pandemic.
The risk is that these salary increases are not sustainable and will soon be feeding into inflation. In turn, this will lead to higher interest rates as the Bank of England tries to drive prices back down.
Inflation fell to 7.9 per cent in June, which was better than most economists predicted, and it is expected to drop again. But the latest pay figures create a dilemma for the Bank, which may be tempted to put up interest rates again – wrongly, in my view.
The risk is that these salary increases are not sustainable and will soon be feeding into inflation. In turn, this will lead to higher interest rates as the Bank of England tries to drive prices back down, writes Ruth Sunderland
Yesterday, unions and Left-wing think-tanks greeted the wage rises with the usual bleatings that they were still not enough.
But workers would not be any better off if employers capitulated to these intemperate demands. Everyone will merely be running ever faster to an economic standstill.
The only way to achieve better living standards in the long term is to earn them through improvements in productivity and growth. Giving pay rises merely to keep up with inflation is at best futile and at worst positively harmful.
The Covid lockdowns have caused deep damage to the labour market and, I would argue, to the great British work ethic. A dearth of willing and able workers is holding back growth in sectors from manufacturing to hospitality.
Any employer will say labour shortages are their biggest problem. Even though vacancies have come down, businesses are trying to fill a million empty roles.
A key priority is getting Britons back to work. But employers are contending with a workforce that has become more demanding, both in terms of pay and wanting jobs that do not interfere too much with their lifestyle. Candice Mason, who runs Masons Coaches in Hertfordshire, gave a vivid picture of the problems facing employers in an interview with the BBC yesterday.
She described how difficult it was to hire drivers prepared to work the hours when customers want to travel. The pandemic, she said, had changed their mindset.
Campaigners from Positive Money outside the Bank of England asking for pay rises rather than interest rate increases
As she raised wages, drivers responded by cutting their hours. When she tried to provide a better work-life balance by changing rosters, she found she had holes in her timetable. Originally, she thought it would take her six years to get her company back to where it was before the pandemic, now she says it will take ten.
This situation is being replicated in businesses up and down the country. The official jobless rate is low, at 4.2 per cent. But this is dwarfed by the numbers classed as ‘economically inactive’: that is, not working and not looking for a job. More than one in five of the working-age population is in this category – 8.7million. Of those, record numbers are long-term sick. Some are no doubt genuinely ill, while others will be stuck on an NHS waiting list. But many could be helped back to work. So, too, could some of those taking early retirement.
Productivity in the UK has lagged behind our rivals for years, so is it any surprise that we’re the only country in the Group of Seven developed nations that has yet to recover fully from the pandemic?
There is no easy fix. The Government needs to encourage investment in the industries of the future with tax breaks and incentives. Employers need to work with schools and universities so young people – and older ones – can acquire the skills needed to work in them.
Only once we achieve higher growth should we grant higher wages.
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