Source: BBC News
With the constant demand of an increase in wages all over the UK due to the rise in cost of living, a 7.3% rise in wages over 3 months has occurred (Edser and Islam, 2023). Although this may come across as a positive, it is actually extremely impactful to the Bank of England (BoE) and causes immense pressure on inflation potentially hindering the positive effect that has arisen of a 7.3% wage increase. This though, is not the only impact. This article goes through to explain the positives and negatives of growing wages.
Inflation
Inflation is BoE key focus currently because the impact of COVID-19 has meant inflation is over four times higher than BoE target (It is at 8.7% compared to its 2% goal) (Edser and Islam, 2023). This clearly shows how much wages have lagged behind inflation. This will keep pressure of inflation constant and potentially increase so the economy will suffer largely. Inflation indicates higher prices and also less demand for goods, services and financial assets. As a result, the UK's GDP will also likely suffer a loss, meaning a shrinking economy could occur. This therefore adds to the gap of GDP growth in the UK compared to other countries like China and the US.
(Edser and Islam, 2023)
Unemployment
The unemployment rate has risen to 4% (Schomberg, 2023) in this 3 month period too, this is because wage increases causes costs for firms to shoot up. This insinuates cost decreases must be implemented so the firm is able to continue operating at its original rate. A quick way to do this is for labour force to be smaller, hence this rather large unemployment rate.
Also, many individuals may seek unemployment. This is because in times of economic turmoil a negative mindset can be evident so people are more likely to get money in other ways like the unemployment benefit. This therefore adds to this unemployment rate even further.
This 4% unemployment rate is about 1-2% above the optimal rate once again showing the economic turmoil UK is still currently situated in.
Bonds
Inflation has also meant British Government bonds had a fall by around three basis points due to its extreme sensitivity of changes in interest rates. This mainly occurs because price and interest rates of bonds have a negative relationship however, the intuition this implies is the fact that the returns from the bonds will rise suggesting the government will issue even more of these bonds most likely.
Pound
When the statistics of the UK wage growth was released the pound rose to its strongest position since the second quarter of 2022, where it was up 0.28% compared to USD and 0.1% compared to the Euro (Barnes, 2023).
It is clear that the impact from the current Cost of Living Crisis is immense as the required slight increase in wage has caused numerous impacts with the most vital being the pressure of inflation. These all-show positives and negatives for the UK however, the everyday person and student like yourself may still wait a little while to see inflation to fall to the 2% target which signifies an optimal economy. This is also down to the fact that it is unlikely that wages will stop rising and will continue to grow at a pace which is far too quick for the BoE to alter the interest rate and also too fast for the Marginal Propensity to Consume too tolerate the growth rate. This was stated by Samuel Tombs, he went on to say "But it always has taken a little time for changes in labour market slack to influence wage growth and some leading indicators remain encouraging." This does though imply this wage growth isn't critical for the future of the average UK citizen. This though must ultimately be at the forefront of the BoE's focus so they can adjust their budgets accordingly.
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Bibliography
N. Edser., F. Islam, (2023) ‘Record pay rises fuel fresh inflation fears’, 11 July. Available at: https://www.bbc.com/news/business-66156713 (Accessed: 11 July 2023).
A. Barnes, (2023). 'LIVE: FTSE higher as UK wage growth piles pressure on Bank of England' , Yahoo Finance. Available at: https://uk.finance.yahoo.com/news/live-ftse-uk-wage-growth-boe-stocks-wall-street-073444502.html (Accessed: 11 July 2023).
Schomberg, W. (2023) ‘UK wage growth matches record high, keeping BoE under pressure’, Reuters, 11 July. Available at: https://www.reuters.com/markets/europe/uk-annual-wage-growth-73-three-months-may-ons-2023-07-11/ (Accessed: 11 July 2023).
By Samuel Golder
Founder and Editor
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