UK wage inflation – productivity and its importance to UK economy

One of the big questions repeatedly asked by economists over the past few years has been why, with unemployment falling and the UK economy growing, UK wage inflation has been slow.

As employees we have a certain vested interest in trying to find an answer to that question and for the UK, a slow increase in average wages reduces our potential spending power which in turn reduces the rate at which the whole economy grows. This becomes a particular problem at times of high inflation (the rate at which the price of goods and services increase) because if prices rise faster than earnings, in real terms most of us are actually becoming poorer even if the economy is growing. With the recent decrease in the value of the pound against foreign currencies, there is every chance that inflation will increase over the next few months as the costs of imported goods and services will rise, which, unless accompanied by corresponding UK wage inflation, will reduce our spending power.

So what, if anything, can be done to get our wages growing again? The answer probably lies in increasing our productivity, a word we are hearing more and more about. Productivity is simply the output per hour of an employee. On a national level and in simple terms, it can be measured by dividing the overall gross domestic product (GDP) of a country by the number of people working.

Economists have spent much time analysing recent changes in UK productivity and how these might be linked to changes in our earnings.

For clues about our productivity performance we need to look at changes to our economy since 2008, a year which started a fifteen month fall in our GDP of about 6%. Interestingly, employment levels in the corresponding period only fell by 2% which meant that far fewer people lost their jobs than would normally have been expected. One explanation is that although there was a reduction of only 2% in the number of people employed, the total hours worked by UK workers fell by 4%, so rather than losing our jobs we worked less hours, but that still represented a 2% fall in output per employee. The total number of employees and the number of hours they work has now exceeded pre-recession levels, but output per worker (productivity) is still some 3% below the level that applied in 2008. So now back to the link between productivity and wages.

The two factors which will dictate the levels of UK wage inflation in a market economy will be the degree to which workers increase their productivity and the overall size of the labour market. In the UK these two are strongly related. The population of working age has increased significantly over the past thirty years – from 35.4 million in 1981 to over 41 million today – about half of this increase can be attributed to net migration. With labour in relatively plentiful supply and competition for available jobs high, employers have not been under pressure to increase their rates of pay, particularly for low skilled jobs. Relatively low wages might also be held responsible for the lack of increase in productivity. With wages low, companies can choose to employ more people to increase their output rather than investing in the capital equipment that will enable fewer people to produce the same output. Evidence suggests that business investment has been much lower since the recession of 2008/2009 than one would have expected.

In recent years, low wage growth and low productivity have been a significant drag factor on the UK economy which depends very much on consumer spending to achieve economic growth. In the short term consumers can maintain their spending power by borrowing, particularly if price inflation and interest rates are low. But in the longer term, spending by consumers can only grow if their wages are rising and this necessitates an increase in capital spending by companies allowing higher worker productivity.

Andy Milson, Head of Partner Training & Development at BNP Paribas Leasing Solutions

Andy is an experienced sales and finance professional with over 25 years’ experience in sales aid leasing. Andy is widely recognised as an expert in business finance and has in recent years focused his attention on developing partner sales teams develop an understanding of how businesses secure project financing. His training programme – Finance Unlocked – is a highly rated customisable course and is offered at no cost to partners.

If you’re interested in helping your sales team overcome finance-related hurdles during the selling cycle, please get in touch with Andy on
07966 114 243 or email here.