When the Bank of England’s governor Andrew Bailey suggested last week that employees should resist asking for a wage rise this year as although “painful”, doing so would serve to prevent inflation from “becoming entrenched”, it was bound to cause some uproar. Trade Unions and NGOs were quick to criticise, while Treasury representatives sought to distance themselves from the comment leaving Mr Bailey as something of an outlier.
The timing of his intervention, coming in the same week as confirmation that the planned National Insurance rise would go ahead, news of latest inflation figures and confirmation of the raised energy cap all mean that it was unlikely to achieve much cut-through, as many workers feel under increasing pressure from rising costs of living.
It isn’t that he is incorrect, at least as far as I can remember of economic theory from A-Levels, but I cannot help but feel that one of the UK’s most senior economists has got lost in the theory and forgotten about the human element.
Economics vs Politics
The pragmatism of economics opposing the idealism of politics is a little bit like oil and water, however since 1997 when the new Labour government passed control of key economic levers to the Bank of England, and in particular the Monetary Policy Committee (of which Andrew Bailey is the chair), any conflict has eased.
A political policy to instil confidence in a governing party with a historically poor reputation for managing the economy has largely been a success, decisions being taken by experts have led to greater economic stability than in previous times and equally have meant that those policies tend to carry greater weight and respect, particularly from opposition politicians.
Since the start of the Vote Leave campaign, one of the key catchphrases brexiteers have peddled out is the desire for a ‘high-wage economy’, an admirable desire but one which fundamentally puts pressure for delivery on the private sector and is ideally achieved through a protracted period of growth rather than something rapid such as high inflation; and realistically I would expect that neither side wants salaries to grow simply because of inflation ever.
Reality
The issue with Mr Bailey’s statement is that it ignores day-to-day realities for the majority of people; a criticism which could equally be levelled at some of the most respected data too, for example inflation measures such as the CPI don’t recognise the weighting of certain items that are purchased more often, in greater volume or at higher costs over others which come in lower.
And although the inputs to the measure inflation change in order to recognise consumer trends/fashions there isn’t the It also ignores some changes to behaviour or activities, during a winter period when we spent more time in our homes than perhaps any other time (other than the year immediately before) our energy usage is already greater in terms of units, for prices to rise too is a double whammy; while this will ease slightly as weather improves it coincides with a greater push for employees to return to offices, and in doing so incur commute costs that almost disappeared in the preceding 22 months, further raising the cost of living… or at very least, the cost of working!
Of course, cost rises are not exclusive to consumers; businesses too have been facing cost rises just as significant as those faced by their employees, hence rising inflation; and in some cases such as with energy bills the rise could be even greater as the cost cap only applies to consumer pricing. Equally they will have been hit by rising fuel prices, planned increases to the telecommunications bills, and even without salaries rising, the cost of employing people is already going to rise.
Employment Costs Already Rising
Much has been made recently of the UK government’s plans to rise National Insurance Contributions this year, with opposition politicians and some parts of the media highlighting the additional pressure this will put on households, and in particular those with lower incomes. While the government’s justification of the rise to fund increased spending on the NHS is admirable, it feels fair to say that it is deaf to the financial impact on people. Less however is being mentioned that the rise applies equally to employers as well as employees meaning that NICs will go from 12% to 13.25% - a direct increase in the cost of employing someone of 1.25%.
So with all these arguments considered, it would seem that Andrew Bailey’s argument that people should bear the pain for the time being until inflation slows once more is fair right? Well not entirely.
Choices
Andrew Bailey’s suggestion that workers should hold back from requesting salary rises may come with sound justification based on economic theory, but it overlooks the fact that people have free will and face choices as living costs rise, such as whether or not to follow Mr Bailey’s advice, with either option leading to a number of further decisions.
If they do opt to tow the Governor’s line, they may face decisions over things they consume, picking food over fuel for example; alternatively, they may seek secondary or new employment, all of which could come at a cost to their employer, through decreased productivity as a result of fatigue or the loss of a member of staff. However, they may choose to ask the question that Andrew Bailey tries to deter and put at least one decision at the feet of their employers, to agree to a pay rise or not.
At first sight, for a business, this choice would be easily quantifiable; they will know the cost that accepting an individual request will incur, and more likely recognise that in doing so, they would be likely to hand salary rises to a (potentially significant) number of employees and therefore what this greater cost would be. But what they may struggle to determine is the cost of saying ‘no’ and putting the decision making right back in the hands of the employee.
Usually at times of economic instability, such as fast rising inflation, the job market would be stagnant and therefore an employee would have little choice but to carry on in their current role, perhaps even feeling grateful for having a job in the first place and make personal sacrifices where necessary. But we are not in normal times. UK GDP figures for 2021 have just been released and show record growth, all the while, we are regularly told there are record numbers of job vacancies, and here lies the reality of the situation we are in, and why it may prove that pay rises are inevitable.
Currently, people have a choice which could be easy to exercise; they can seek alternative employment. Even without a short supply, high demand job-market this is very likely to give someone the salary increase they desire, taking off the pressure of the squeeze from rising costs of living, and giving their new employer the benefit of an energised employee who is grateful for the opportunity and unencumbered by outside concerns.
But for the business they have left there is the potential for a sizable cost; this will create a vacancy which the business may not choose to re-fill, a move which would likely result in some reduction in productivity. There will also be intangible costs such as to the morale of remaining employees who in light of colleagues leaving may consider it too, plus the loss in knowledge/expertise that comes from an experienced mind.
Alternatively, the business may choose to replace the employee lost, perhaps there will be a short gap with reduced productivity but at the end of the recruitment, onboarding and training cycle parity will be restored, perhaps a 3-month period.
Equally, in a short-supply, high-demand job market, we tend to see salaries increase as the primary tool most businesses possess to attract talent over a competitor; there are alternatives such as down-grading the role in the quest for more less-experienced candidates who tend to be in greater supply, or even training schemes, but these will come with increased timelines to reach full ‘operating’ over hiring an experienced candidate.
Of course, the recruitment itself could come at a cost too; from the circa £200 for a one-off advert on a job board (which could be as much as 1% of the salary) to around 25% of salary for a recruitment consultant fee…. plus of course the intangible costs as per above!
With this maths in mind, giving an employee a 5% salary increase (roughly in line with inflation) doesn’t look like too bad an option right now, and in fact heading off the inevitable (with the likely benefit of a boost to employee morale) by offering the increase before being asked for it could be a pretty sound strategy.
Of course, for some businesses 5% is more than they can afford to bare, depending on how big a percentage of total costs employment equates too, this could mean a 3 or 4% rise overall; or for some businesses, the difference between achieving a profit or sustaining a loss.
At intelliHub we have countless strategies to help businesses control costs, improve productivity, boost profitability, and grow; all without impacting the engine room of the business, its people. These are strategies we believe in, and therefore with every project we undertake, we guarantee a multiple return on investment, because it wouldn’t be good for our clients to do it otherwise.
If you are keen to join the growing number of businesses intelliHub is helping to accelerate forwards in the post-pandemic world, we would be very happy to explain how we can support you. Visit www.intellihub.co.uk to read more or email talktous@intellihubconsulting.com
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