Bank of England governor Andrew Bailey and Chancellor Jeremy Hunt expressed the need for wage restraint to control high inflation during a speech at the annual Mansion House dinner. The event was attended by around 400 people from the financial and business sectors and took place at the official residence of the Lord Mayor of London.
Their statement comes at a challenging time when businesses and households are experiencing increased costs due to high inflation in the UK. However, Chancellor Hunt suggested that companies should limit their profit margins, stating that “it doesn’t benefit anyone if profit margins contribute to inflation.”
Real-Term Pay Cuts Affecting Workers
When pay increases more than the cost of living, it’s called a real-term pay rise. This means that a worker’s wages are growing faster than prices, so their income can buy more. On the other hand, when pay increases less than the cost of living, it’s like a real-term pay cut because prices are going up faster than wages. Hence, workers will not have too much room to stretch financially.
In May 2023, Oxfam reported that workers in the UK saw a 2.5% real-term pay cut in 2022. Based on information from the International Labour Organization (ILO), the numbers, which take inflation into account, show that shareholders received a record amount of $1.56 trillion in payouts in 2022. This is a real-term pay increase of 10% compared to 2021.
However, at the same time, workers collectively lost over £23 billion in wages because their pay did not keep up with inflation. On average, each worker lost £715, which is like working for 5.3 days without getting paid. Meanwhile, top CEOs received a pay raise of 12.3%, without considering inflation.
There are several reports that corroborate that real-term pay cuts are affecting UK workers. ONS has recently reported that employees’ regular pay (excluding bonuses) grew by 7.3%. Additionally, total pay, including bonuses, also increased significantly by 6.9%. However, when adjusted for inflation, the reality is that total pay decreased by 1.2% in real-term, and regular pay decreased by 0.8%.
Unions Are Not Convinced
Mr Bailey says inflation is at the top of the agenda and recognises that the UK has been hit by many inflationary shocks like higher prices in the global market, and the war on Ukraine.
He further adds, “Looking ahead, UK headline inflation is set to fall markedly over the remainder of the year. This largely owes to lower energy prices as last year’s substantial increases drop out of the annual calculation. Food prices should fall too as lower commodity prices feed through to prices in the shops.” Chancellor Hunt reiterates that the government will do everything necessary to bring down inflation.
This is not the first time the Bank of England has suggested that workers do not ask for pay rises to help with inflation. Last year, BoE came under fire from unions who were not convinced with their statement and disagreed with incorporating wage restraint.
TUC General Secretary, Paul Nowak, says in response to the speech, “The government must stop scapegoating workers for its failures. Wages are not driving inflation – they are not even keeping up with it.” He points out that pay is even further behind in the public and lower-paid private sector industries. He further adds, “Working families have been struggling with falling living standards for 15 years. Ministers shouldn’t be forcing households to become even poorer.”