Changing Powers for UK Workers After Wage Suppresses Profits

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(Bloomberg) — British workers are getting a bigger slice of the economic pie than before the pandemic, signaling a shift in the balance of power away from employers after chronic labor shortages delivered unprecedented bargaining power over wages.

The share of the economy that workers take in wages has climbed to its highest level since the early 2010s, when excluding distortions during the pandemic, analysis of official statistics show. The proportion taken by profits meanwhile has been falling. 

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The findings indicate that instead of passing on higher wages to consumers, firms have hit the ground running and are scrambling to raise prices to compensate. That will comfort the Bank of England, which is looking for signs that inflationary pressures are contained as it weighs how to cut interest rates quickly.

Paul Dales, chief UK economist at Capital Economics, said the labor share could stabilize if wage growth was above pre-Covid levels.

“It’s really driven by wage growth, so before the pandemic, wage growth was unusually low by historical standards,” he said. “But since the epidemic, the growth of salaries has increased significantly. It is still unusually high.”

The figures also cast more doubt on claims of “inflation,” a contentious topic at the height of the electricity price shock when firms were accused of defrauding customers by using inflationary cover to raise prices beyond what they needed.

In fact, businesses and workers are looking to recoup money lost due to the massive price hikes triggered by pandemic supply disruptions and then Russia’s invasion of Ukraine, which sent energy and food costs skyrocketing.

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The nation’s workers have been hit by a spike in health-related unemployment that has left sectors from construction to hospitality struggling to fill vacancies. Average wage growth reached around 8% over last year and is still around 5%, while wages are also growing in real terms.

Last month’s budget threatened to tip the scales in favor of workers, as the Labor government announced another big increase in the minimum wage and a £26 billion ($32.9 billion) increase in national insurance premiums paid by employers.

The labor force’s share fell before the pandemic during a decade of stagnant wages following the global financial crisis, falling to 47.7% of gross domestic product in 2017. We have recently settled below 50%, reversing another noticeable decline. 50 years ago.

Firms are likely to take a hit on their profits because a weak economy means their pricing power is not strong enough to pass on the credit for higher wages to consumers. Bank of England figures suggest the dividend has fallen to its lowest level since 2007.

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The central bank pointed to evidence that interest rates have fallen in its Monetary Policy report earlier this month, highlighting the reduction in money allocated to small firms. It said there is a risk that this trend could lead to firms laying off workers, adding that consumer-facing services, such as retail and hospitality, are struggling to pass on higher costs due to lower demand.

Benjamin Caswell, a senior economist at the National Institute of Economic and Social Research, said it was too early to say that the rise in the labor force’s share was the start of a trend.

“It is something that should be looked at, especially in the next few years as we see strong growth in wages and as we see measures announced in the budget,” he said. “It will be interesting to see if the share of workers decreases based on some of these announcements that we saw in the budget last month.”

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