Wages in manufacturing are set to rise, with their growth exceeding inflation. This could create a knock-on effect, pushing up on wages elsewhere. Is this good news? It depends.
There are three reasons why wages might rise. One is to do with supply, the lower supply of labour, the higher wages. The second is to do with demand, so far, that’s simple economics. If wages rise for either of these two reasons, inflation can be the result.
But wages may also rise because of a jump in productivity. Drill down, and it is still a matter of demand and supply, but there is a big difference in the end result if, for example, a new innovation makes labour more productive, increasing wages.
According to the latest Bank of England survey of regional agents, a shortage of factory workers is beginning to push up on wages. According to the latest survey from the Recruitment and Employment Confederation, firms are having to pay more to attract workers.
If manufacturing workers are paid more, in theory, there should be a ripple effect, leading to higher wages elsewhere.
The Bank of England projects pay growth in 2018 of between 2.5 and 3.5 per cent.
Inflation is expected to fall from the current three per cent level next year, so in theory then, real wages are set to rise.
But not so fast. What happens next matters. If employers react to having to pay workers more by increasing prices, inflation will surge, interest rates will go up, and indebted families may find that after paying interest on debts, they have less money, even after their wage rises.
But if employers react to a shortage of workers by investing more in technology to increase productivity, we will be in a win win situation, higher wages without the increase in inflation.