MNI INTERVIEW: UK Faces Real Wage Squeeze Not Pay Boom

UK workers are more likely to face a real-wage squeeze than a pay rise, as short-term tightness in some parts of the labour market are outweighed by rising energy prices, John Philpott, a labour market specialist who has frequently advised lawmakers, told MNI.

While research suggests that shortages of workers including heavy-goods vehicle drivers may be hard to overcome quickly, they may not augur a pay boom sufficient to power the UK's transition to the high-earnings, high skill economy promoted by Prime Minister Boris Johnson and his government, Philpott said in an interview.

"Contrary to all the current headlines, I don't foresee an imminent and potentially inflationary 'British wage boom'. Indeed, with various price pressures emerging from outside the labour market, especially for gas and electricity, a sobering real wage squeeze may well be on the cards," he said, adding that he did not anticipate "a significant widespread increase in wage pressure or a return to wage-push inflation."

While post-Covid bottlenecks create short-term wage pressures in sectors such as HGV transport, in a flexible labour market these should not influence wage expectations overall, in his view. And nor should post-Brexit structural changes impacting sectors such as hospitality which expanded by utilising a near-perfectly elastic supply of EU migrant workers.

PERSISTENT BOTTLENECKS

"Much of this [pre-Brexit] expansion has been driven by firms only able to operate on the basis of low wage business models that can't accommodate the higher wage costs necessary to meet labour shortages. Rather than see higher wages in these sectors and/or a switch to use of 'home grown' workers, a more likely outcome is an eventual contraction of output and employment at current wage levels," Philpott said.

His concerns were echoed by written evidence to the parliamentary Treasury Select Committee published on Wednesday from new Bank of England Chief Economist Huw Pill, who said the economy faced an "adverse supply shock centred on mismatches in the labour market."

While supply bottlenecks are widely expected to resolve themselves in the medium term, there is evidence that they may not fade away swiftly.

Jobs platform Indeed looked at clicks on ads for UK-based HGV drivers following reports of migration restrictions being eased and wages rising, but found most of the interest came from non-EU countries whose drivers' qualifications were not recognised.

Even the sharp recent rise in HGV pay rates in the UK, taking them to similar levels to those in countries like Germany and the Netherlands, may not prove sufficiently attractive to lure more foreign drivers, particularly given poorer working conditions, Jack Kennedy, economist at Indeed Hiring Lab, told MNI.