Education Information

5. The problem is not that wages are too high

It is difficult to make the case that QE and “money printing” have caused inflation today. Instead, a more common argument is the claim that a “wage-price” spiral is either already operating or is about to kick in soon. A “wage-price spiral” is meant to describe a situation in which, because wages are rising, companies are forced to push up the prices they charge. This in turn leads to worker demands for higher wages, forcing further price rises, and so on. Inflation, presumably, takes off. This is the argument that Boris Johnson and other senior Tory politicians have used to deny workers in the public sector a pay rise that matched inflation. The 16 Governor of the Bank of England, Andrew Bailey, who earns around £500,000 a year, tried to make the same point when he said workers should exercise “pay restraint”. In plain English “pay restraint” means not asking for pay rises that meet inflation. It is immediately obvious what the problem is with this argument: wages for most people in Britain are low and have been so for a long time. For a decade and a half, even though inflation has been low for much of the time, wage and salary increases were even lower. As a result, in early 2020, when Covid-19 struck, average earnings in real terms were below their level a decade earlier. The graph below shows what has happened to real wages from 2006 to January 2020.

See, for example, Boris Johnsons speaking at the G7 Meeting in Bavaria or the Tory Leadership 16 Debates, available at https://www.pcs.org.uk/news-events/news/public-sector-pay-tory-hopefuls-show contempt-workers

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