Cost of Living: Real wages may begin increasing ‘shortly, experts predict


The past year has been characterized by a wing boom and a record drop in living quality that will have many people crying out for some good news.
Britain is still amid a living crisis, with wages failing to retain up with the price of everyday necessities– but experts have suggested a change could be on the horizon.
A new analysis of the labour retail by the Office for National Statistics (ONS) exhibits that the average pay for private and public sector employees from January to March was 6.7%.
That was up slightly from the 6.6% recorded in the three months to February.
However, adjusting for inflation equals a 2% drop in real terms. A similar fall was recorded in the preceding three months and was among the most significant growth falls since comparable records began in 2001.
However, this design could be about to change, with the Bank of England anticipating inflation (currently 10.1%) to fall to everywhere 5% by the end of this year, with the central bank eventually outstretching its target of 2% by late 2024.

Experts Predict Real Wage Increases in the Near Future

Commenting on the ONS’s latest findings, Hannah Slaughter, senior economist at the Resolution Foundation, said: “On pay, earnings growth is still being surpassed by inflation.
“But a proportional strong growth rate of 6.7%, combined with (hopefully) falling boom in the next few months, means we could see a remit to real pay growth shortly.”
While real terms pay is still falling, the rate it is growing is picking up in both public and personal sectors, the ONS found.
Public sector pay grew 5.6% in March – the highest rate since August to October 2003 – from weak growth since the COVID-19 pandemic.
Government ministers – who last year were heralding the arrival of a high-wage economy – are now urging wage restraint. They reason that attempts to keep pay in line with the boom may stoke further ‘cost-push’ inflation – the procedure by which firms pass on the higher costs of making goods and services through increased prices.

Indeed, talking about pay rises, prime minister Boris Johnson expressed that ‘we are unnatural in what we can do not fair by the fiscal position – the risk of taking too much – but by the possibility that we will fan the flames of further price increases […] we cannot fix the grow in the cost of livelihood just by growing wages to match the surge in prices. I think it is fine for pay to go up naturally, as skills and fertility increase’ (GOV.UK).
But are productivity growth and wage growth conflicting with high inflation? And what entirely do we mean by boom?
Most economists wouldn’t baulk at the design that wages can grow in line with fertility. If the economy is more organized, that is usually reflected in the pay growth, and everyone shares the gains.

Real Wages Poised to Rise, Providing Relief from Cost of Living Challenges

Standard economic textbooks link productivity to wages net of the level of prices. This link should hold regardless of the inflation rate since what matters are the actual rates of fertility and wage growth– the rate of growth minus the rate of inflation.
Productivity – or, more strictly, labour productivity – is measured by dividing the total value of the output of goods and help produced minus the value of store (known as gross value added or GVA) in the UK by total hours worked. This calculation also considers (or ‘nets out’) the prices of these goods and services.
Think of wealth with a yearly inflation rate of 2% and nominal productivity growth over the year of 5%. In this case, the actual rate of productivity growth is 3% (the 5% growth in productivity less the 2% inflation rate). Such an economy would allow a natural wage rise of 3% if wages went up in line with productivity.
Equally, an economy could have an inflation rate of 5% and nominal productivity growth of 8%, allowing real wage rises of 3% (8% minus 5%) or even inflation at 10% and little productivity growth of 13%. Real pay growth is the same in each case.

Of course, these calculations presume that inflation does nothing to harm productivity growth or the broader economy. Yet there is much evidence that higher inflation rates might reduce people’s ability to buy things, mainly if they are on fixed incomes (usually the less well-off). Higher inflation may also deplete people’s reduction (usually among wealthier people, who tend to have fresh protection) and even hamper government finances (since debt payments are often linked to the charge of inflation).
The process of netting out prices is called deflation. A deflator is just a number economists use to re-scale another number – in this case, to convert the headline (nominal) wage growth into a ‘real’, inflation-adjusted value.
Deciding which cost to use as a deflator is not straightforward and depends on which profitable issues are being looked at. The Office for National Statistics (ONS) make a vast array of indices that measure the change in different types of prices (an index is not a specific price but rather a way of capturing the relative price movements over time). Which to use is a matter of sound judgement.

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Olivia Wilson
By Olivia Wilson


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