The Week: Who wins and who loses from higher wages?

The UK is moving to a high wage economy, according to the government, but will corporates have to foot the bill?

  • There are some advantages to higher wages: more money in their pockets should fuel consumerism
  • There will zero advantages to higher wages if it leads to higher inflation
  • Could higher wages for low-skilled work ultimately accelerate technology adoption?

The Prime Minister’s response to the fuel crisis has been to suggest that this was the plan all along: a ‘high wage’ economy, full of wealthy HGV drivers and fruit pickers. The problem may be two-fold: who will pay for it? And will it lead to inflation?

Clearly, there are some advantages to higher wages. People have more money in their pockets, theoretically fuelling consumerism. It will address some of the problems faced by families that are ‘just about managing’, who have found the rising cost of living difficult to endure.

However, there will zero advantages to higher wages if it leads to higher inflation. Business leaders report rising pay demands, spreading out from the obvious areas, such as HGV drivers and supermarket workers, to bankers and lawyers. The Bank of England estimates private sector pay growth at around 4% and it’s not clear that all the bad news is in the price just yet.

It is clear that the Government expects business to foot the bill. Boris Johnson has criticised the transport industry for relying on cheap foreign labour and he is right that there is little excuse for conspicuously poor pay and conditions. The problem is what happens from here – businesses either foot the bill for higher wages and it dents their profits (and therefore share prices) or they pass the costs onto the consumer and it manifests in higher prices. It is difficult to see how either is good for the economy as a whole.

Equally, a high wage, high productivity economy is very different to just a high wage economy. Paying more for the same job does not improve productivity, which has been one of the thorniest problems faced by the UK economy. Surely there is a potential problem that if businesses are paying more for their lower-skilled labour, they have less capital to invest in improving skills for the remainder of their work force? This would seem to be, pardon the pun, counter-productive.

The big winner may be technology. Faced with rising wages, companies may have no choice but to invest in technology. For many management teams, the pandemic has already highlighted the importance of digitisation. Higher wages will only reinforce it. Rather than a higher skilled economy, the future may now be a robot.