Labour shortages and inflation

Why Rising Wages Cause Inflation

• If wages rise, firms will try to pass on the cost increases to customers – leading to cost-push inflation.
• If wages rise, workers have an increase in income leading to higher disposable income and higher spending – this can cause demand-pull inflation.

However, it is possible that even with a shortage of labour we may avoid inflation.

• If firms have monopsony power and can avoid paying higher wages despite the shortage
• If vacancies are being filled by migrants from abroad. (though you could say if migrants can enter the labour market then there isn’t a shortage, but, in the boom years of 2003-07, migrant labour was important for keeping inflationary pressures low in economies like Ireland and UK.
• If other inflationary pressures are muted. A shortage of labour puts upward pressure on wage increases, but, other factors affect inflation. If interest rates are being increased and the economy is experiencing efficiency savings, overall inflation may not be affected very much

Read more

Inadequate income

Nearly a third of the population of Britain is living on an "inadequate" income, according to research by the Joseph Rowntree Foundation (JRF).

In 2014-15, it said that 19 million people were living on less than the Minimum Income Standard (MIS).

It said the problem was that household costs have been rising, while incomes have stagnated.

The government has already promised to tackle the issue, after Theresa May identified those "just about managing".

It said it was taking "targeted action" to raise incomes.

The MIS is set by experts at Loughborough University, and is based on what members of the public think is a reasonable income to live on.

Although the precise level depends on individual circumstances, a single person renting a flat outside London is said to need to earn at least £17,300 a year to reach the MIS.

Read more

Questions

1. What is MIS?

2. What steps can the government take to raise income?

3. Why have incomes not risen with costs?

Wage growth

Wages grew faster than the rate of inflation at the end of 2016, official figures show.

In the three months to December, wages grew 2.6% on an annualised basis in the UK, according to the Office for National Statistics (ONS).

However, that was slower than the previous period, leading analysts to suggest households could face a "squeeze" on spending later this year.

The ONS also said the jobless rate held steady at an 11-year low of 4.8%.

The number of non-UK nationals working in the UK increased by 233,000 to 3.48 million compared with a year ago.

Household squeeze

"The unemployment rate is now at its lowest in over a decade, but wage growth remains subdued by historical standards," the ONS said in its commentary.

Wage growth slowed from the 2.8% rate seen in the three months to November.

Read more

Questions

1. If unemployment is so low, why haven't wages grown?

2. What factors determine wages?

3. How can a company increase wages but lower wage costs?

4. If unemployment falls, wouldn't supply of goods increase - in which case why is inflation rising?

Wage determination in perfectly competitive labour markets

An explanation of how wages are determined in a perfectly competitive labour market.

A perfectly competitive labour market will have the following features

• Many firms
• Perfect information about wages and job conditions
• Firms are offering identical jobs
• Many workers with same skills

Read more

Also.....