Should employers show wage restraint to help stem inflation?
As inflation continues to climb, Bank of England officials and government ministers agree that employers and their staff need to show wage restraint to avoid a wage-price spiral
Speaking on Good Morning Britain, Deputy Prime Minister Dominic Raab said that wage restraint is necessary to avoid “a vicious cycle of inflation going up – and staying higher for longer”.
Similarly, Bank of England Governor Andrew Bailey – who is on a £575,000-a-year salary himself – has repeatedly asked workers to “think and reflect” before asking for pay increases. This stems from a concern that additional salary costs would be passed on to consumers, which would push inflation even higher.
But with the consumer price index reaching a 40-year high of 9.1%, this will be a bitter pill to swallow for many UK workers. When adjusted for inflation, real wages fell by 3.4% in April compared to the previous year. This represents the biggest drop in earnings in real terms since 2001, according to the Office for National Statistics.
Should employers meet wage demands?
Many employers will find themselves caught in the middle: should they heed the warnings of ministers about the risks of spiralling inflation or provide staff with the pay rises needed to help them to keep up with the rising cost of living?
George Dibb, head of the Centre for Economic Justice at think tank IPPR, believes that looking at inflation purely in terms of wages is an oversimplification. He says that although inflation is a measure of the increase in prices, there are different components currently contributing to it, from energy prices to the cost of goods and rising profits.
“I don’t think anyone is served well by a debate where we pretend it’s just one factor influencing inflation,” he says. “Talking about wages alone doesn’t help the discussion.”
While the Bank of England has expressed concern that companies could push prices higher if they don’t exercise wage restraint, leading to a wage-price spiral, Dibb believes two factors show that this is not a current risk. Wages are at a low ebb and falling at their fastest rate in more than 20 years when measured against inflation. And research from IPPR revealed that the profits of the largest non-financial companies were up 34% at the end of 2021 compared to pre-pandemic levels.
“When prices are going up, profits are going up and wages are going down, that translates to a transfer of wealth away from working people and to shareholders and we don’t think that is fair,” Dibb adds. “Wage restraint may be a concern in the future but not at the moment. The most pressing thing that we need to worry about right now is profit restraints.”
Many leading economists agree. Last week, 65 academics wrote a letter to Prime Minister Boris Johnson, saying that suppressing wages is “the exact opposite of what is needed in response to this current wave of inflation”. Instead, they suggest the government should “use all the tools at its disposal to hold down energy costs, clamp down on excess profits, and unblock global supply chains”.
What if pay rises can’t be met?
But not all businesses are seeing these record profits now. Most of those profits (90%) were concentrated in 25 companies, many of which are in the gas or commodities markets.
“For companies that are seeing increased profits, the answer is clear. They should be passing those benefits to their employees and bringing their prices down,” Dibb says. “For companies that aren’t, I understand they’re in a very difficult situation and there are no easy answers. I think the question then becomes a political one – how to get out of this inflationary period without seeing the economy tick over into a recession and seeing these businesses collapse?”
Calls for wage restraint from the likes of the prime minister and the governor of the Bank of England may provide some form of justification for employers seeking to limit pay rises. But James Willis, head of employment law at Stevensdrake Solicitors, warns: “Legitimate concerns about the looming cost-of-living crisis are likely to weigh much more heavily on the minds of many workers than the opinions of politicians and technocrats.”
He admits that “most contracts of employment reserve a wide discretion to award whatever pay rise an employer thinks is fit or no pay rise at all”. There remains the risk, however, that employees who do not feel properly compensated will seek employment elsewhere.
Adding to this challenge is the wider labour market which, due to a combination of record high vacancy rates and low levels of unemployment, is extremely tight at the moment.
Steve Tonks is senior vice president EMEA at employee management platform WorkForce Software. He thinks that employers face a difficult choice. “They either increase employee wages – when many businesses themselves are only just beginning to recover from pandemic-induced losses – or they risk losing staff to higher-paying employers,” he says.
Some companies have sought alternatives that recognise the challenge many people face now, while also being conscious of the ongoing business costs.
Following action from Unite, the union representing Lloyds Banking Group staff, the high street bank has offered 95% of its staff a one-off payment of £1,000 to help them with the rising costs of living.
Similarly, publisher Bloomsbury will reward staff with a 6% bonus, following record annual sales. In these instances, the advantage of offering a one-off bonus means that employers are not locked into paying higher wages the following year, should inflation or their profits come down again.
Tonks suggests that earned wage access – a payroll scheme that allows employees to access their pay as soon as they’ve worked the hours – could be another way to alleviate current pay pressures. He adds: “Although increasingly important in today’s climate, pay is not the only consideration for many employees. Considering the overall employee experience is a way to retain staff when pressure on wages is high.”
While some employers might be conscious of adding to the current inflationary pressures, many economists believe that wage restraint is not the right course of action currently. Equally, unless some form of support is offered to employees, the consequences of losing staff to higher-paying competitors may end up being a bigger challenge.