If UK wages are going down, why aren’t rent, food and energy prices coming down too?
R ecent news about the UK economy has been a series of staggering highs and lows. The highs have often featured UK companies. Profits have reached record levels, as in turn have the indices that track the value of those companies’ shares, providing a bonanza for executives and shareholders alike.
The lows have featured British households. The cost of living crisis reflects the combination of higher prices for essentials with household incomes that are at best standing still. The Resolution Foundation reported in late 2022 that British workers were living through a two-decade wage stagnation.
This disjuncture is certainly morally jarring. But it is also intellectually jarring. At one level, the two developments are clearly connected. Part of the reason that UK companies are generating record profits is precisely because they are successfully keeping wage costs down. The wage inflation feared by central banks is nowhere to be seen, least of all in the UK.
Yet it has long been understood that across an economy at large, companies cannot simply drive down wages and expect profits to hold up in the medium or long term. After all, workers are also consumers. Lower wages mean a lower capacity to consume.
To be sure, the credit system can help to support consumption in the face of wage stagnation; but not ad infinitum. Ultimately, wage stagnation will curb demand. This insight is at the heart of Keynesian economics and it underpinned policymaking between the 1950s and 1970s in large parts of the world, the UK included.
On the face of things, this would seem to suggest that the disjuncture that currently characterises the UK economy cannot last. The inevitability of constrained demand surely makes the concurrence of depressed wages
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