British workers are experiencing a shift in power dynamics as they are now receiving a larger portion of the economic pie compared to before the pandemic. This change is a result of chronic labor shortages giving workers more leverage to negotiate higher wages.
According to official statistics, the share of the economy allocated to wages has reached its highest level since the early 2010s, excluding pandemic-related distortions. On the other hand, the proportion allocated to profits has been decreasing.
Instead of passing on the increased labor costs to consumers, businesses are absorbing the impact on their margins. This reluctance to raise prices may be reassuring to the Bank of England, which is monitoring inflationary pressures as it considers adjusting interest rates.
Paul Dales, the chief UK economist at Capital Economics, attributes this shift to the rise in wage growth post-pandemic. He notes that wage growth has been higher than historical levels, indicating a sustained increase in the labor share.
The concept of “greedflation,” where firms were accused of exploiting inflation to raise prices excessively, has been questioned amidst the current economic landscape. Both businesses and workers are striving to recover lost income due to supply chain disruptions and increased energy and food costs.
The surge in health-related inactivity has contributed to labor shortages across various sectors, leading to significant wage growth. The recent budget announcements, including a rise in the minimum wage and an increase in the national insurance payroll levy, further favor workers.
Before the pandemic, the labor share had been declining, but it has now stabilized at just under 50% of GDP. This shift may be impacting firms’ profit margins, especially for smaller businesses facing challenges in passing on higher costs to consumers.
The Bank of England has highlighted the pressure on profit margins in its recent Monetary Policy Report, emphasizing the risk of potential layoffs if the trend continues. Consumer-facing industries like retail and hospitality are finding it challenging to adjust prices due to subdued demand.
Benjamin Caswell, a senior economist at the National Institute of Economic and Social Research, suggests monitoring the labor share trend in the coming years. He highlights the importance of observing the impact of recent budget measures on labor share dynamics.
Overall, the evolving dynamics between wages and profits reflect the changing landscape of the UK economy, driven by labor shortages, wage growth, and government policies. As businesses navigate these challenges, the implications on inflation, consumer behavior, and employment trends will continue to unfold.
