Should employers show wage restraint to help stem inflation?

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.