Britain’s problem isn’t so much low wages as high prices

We have written a few times recently on the way in which many millions of people in the UK are both working and on benefits. This costs the taxpayer a fortune and subsidises the payrolls of the world’s big corporations - and can’t feel that great for those in receipt of benefits, either.

One solution to the problem might be, as we have suggested in the past, to raise the minimum wage. But the real question, and the one we need to talk about urgently, is just why our economy is not able to produce jobs that will support a reasonable living standard.

I put forward a few reasons why this might be last week. It might be because our government focuses on almost nothing but keeping house prices up, I said. It might be because our crappy currency means that we constantly import inflation. It might be because our tax system is all wrong (see my posts on the location tax). It might be because the incentive schemes our big corporate managers work under push them to cut wages and staff before anything else (see my post on Andrew Smithers’ view). Or it might just be a symptom of the fact that Western living standards are beginning a long and nasty fall.

However, the idea that a key part of the problem is more to do with prices than wages is gaining some ground. Research out from the Centre for Business and Economic Research (CEBR) quoted in The Daily Mail, now shows that the cost of living in Britain is 11% higher than the international average. It is 18% higher than in the US; 12% more expensive than Spain and 8% more expensive than Germany.

We are particularly expensive when it comes to the basic building blocks of a standard of living: transport is 31% above average and housing and utilities come in 18% above average. What does that actually mean?

According to Douglas McWilliams of the CEBR, it means that if we could bring the cost of UK goods and services down to be more like the global average, the average UK household would save £2,000 a year. Not bad. So, next question, why are prices in the UK so high and what can we do to bring them down? 

PS, Canada, New Zealand and Denmark are more expensive places to live than the UK, so if you are thinking of escaping the UK to set up home in a cheaper place, cross these three off your list. 

42 Responses

  1. 04/02/2013, Banker wrote

    I like reading Merryn’s analysis but I could not disagree more on her idea that minimum pay should be increased. I think the corrected her views – it is not wages that are low it is prices that are high – and especially house prices that are obscene. Salaries as they are are already too high and that is why jobs are going offshore in masses. Keynesis, hated by many, myself included, predicted that by 21st century people would have to work 15 hours per week to support lifestyle. In fact while historically it was possible for a family to live on one wage – it is now impossible. It looks like all increases in productivity and even future overly-expected increases in productivity went one way – into house prices without benefiting general population.

  2. 04/02/2013, Banker wrote

    Also people’s greed to work more hours under the sun to have more went one way – into higher house pricesa gain for those who had land and a loss for those who actually started to work more. We have a situation that for many people on huge by global standards salary they have no prospect of proprty ownership and no motivation to work. Raising already very high salaries is not the answer – driving costs – and especially housing is the answer. Too much wealth has been channelled out of the country by the loweset paid of this country selling their houses at overinflated prices and returing as queens and kings of Thailand!

  3. 04/02/2013, Shinsei1967 wrote

    An obvious observation is that the currency must have a significant effect on these price differentials.

    After all a relatively insignificant 10% move in sterling/euro would make the UK cheaper than Germany, France and Italy.

    But it would be interesting to know what explains the huge price differential in fungible goods. As of today’s exchange rates a top of the range iPad costs the following:

    Paris £730 London £660 New York £530

  4. 04/02/2013, Shinsei1967 wrote

    @Banker

    “Too much wealth has been channelled out of the country by the loweset paid of this country selling their houses at overinflated prices and returing as queens and kings of Thailand!”

    The UK has run a capital account surplus with the rest of the world every year for the last 100 years.

    So it is simply economically wrong to suggest that wealth is leaving the UK, quite the opposite in fact.

  5. 04/02/2013, Ellen wrote

    Well said. I could not agree more with this article. The UK cost of living is far too high. In the case of a lot of the basics, like housing, fuel and transport, I think there are too many layers of people taking big profits between supplier and consumer.

    The high cost of living, especially for the basics, needs to go down to allow us compete globally.

  6. 04/02/2013, Banker wrote

    @ Shinsei1967

    Capital account surplus is actually a problem. All it means that Britain which not so long ago owned much of the world now is being owned by others. Yes a third world country might benefit from foreign investement that would cause current account surplus – but why would the leader of industrial revolution actually need a capital account surplus if things were going wrong. Also there is a huge difference between UK investors INVESTING overseas (that on everage should bring even more money in in the future) and actually MOVING and SPENDING overseas. I would also doubt whether UK toilet cleaner selling his house for £200k and then moving to Thailand would go through capital account. It probably should go through current account thus inreasing our deficit!

  7. 04/02/2013, robin wrote

    The west has engaged in a massive amount of offshoring; resulting in less employment locally and more consumption based on debt.

    Most of my colleagues are indian sub-contractors who are actually based in India. They complain that they don’t get paid much. India needs to export as they don’t pay their labourers enough to motor their own economy.

    Yet we motor the UK’s economy by credit cards etc. The offshoring should have resulted in massive profits for UK companies by lowering labour costs. But the money was funnelled to india, meaning less money here and less consumption here. Where are the profits that these companies have for offshoring their labour costs? And where is the money that has moved over to india gone?

  8. 04/02/2013, robin wrote

    The money has found its way into the bank accounts of some very rich people. And there it lies. Money sitting in wealthy bank accounts will always work less hard than wealth that is actively managed by entrepreneurs and small businessmen that are ‘closer to the wire’.

    I anticipate someone arguing ‘economies of scale’ at this point, and my response is ‘diminishing returns’. If the last 5 years have taught us anything, its that the entire sector of wealth management don’t know what its doing.

    My point is that the reason we don’t have jobs, is because money is being poorly managed. Some industrialists are very rich. And they are making very poor choices on how to make their money work.

    As for us; We need some more equality. Money will work harder as a result. The answer is a mix of socialist equality and free market competition. The dichotomy of socialism/capitalism no longer applies.

  9. 04/02/2013, Critic Al Rick wrote

    It’s the proliferation of Parasites (rich, poor and intermediate) that makes the cost of living high; social welfare for the plethora of unemployed, massive subsidisation of excessive remunerations, hi-jacking of markets and of the playing-field by rogues in ultra expensive suits, etc.

    But Parasites per se are not the only contributor to the UK’s demise; natural resources have largely been extracted to cost-effective exhaustion, the country is way over-populated, the effects of globalisation, etc

    The UK collectively is effectively a Parasite on the World.

  10. 04/02/2013, Banker wrote

    @robin

    Companies are not charities and have no obligation pt provide employment to population of any particular country. Afterall I am sure you would complaign if tomorrow import of shirts was banned and you had to pay £200 for a UK produced shirt. I most certainly would. When offshoring happens the economy of it is something like this – before labour costs 9 and profit 1 all 10 in the UK, after 8 labour costs 2 profit only 2 in the UK so yes it does take money out of the country. But then if it does not happen and the manufacturer can not compete all 10 units can be lost to the country. The only reasonable way to fight offshoring is to start state inteference with the economy, let house prices collapse allowing UK wages to be more competetive at least in the middle to long term. There is no way that globally competetive wages could support anywhere close to current house prices.

  11. 04/02/2013, Banker wrote

    @ Critic Al Rick

    A number of resource rich counties are extremely poor. As to lack of space – look ar a country with lots of space – Russia – much higher proportion of people live in flats there. If similar prpoportion lived in flats in the UK….

    The problem is high chouse prices / high costs of manual labour. What an incentive a UK teenager has to innovate if he can earn £50k p.a. as train driver of £500 per day tax free as hedge cutter? An indian creative teenager has the option of using one of freelancing sites to design some website write some code an earn his $200 for a small project which is more then his labourer father earns in a month and then he sees that he can make a living out of it. Then some of those will become inventors of much bigger things that will drive economy in the future…. But if you can make so mch in manual labour in the UK and it takes so much money to buy anything worthwhile (like a tiny house) it hardly acts as a motivation to be inventive.

  12. 04/02/2013, Critic Al Rick wrote

    @ 11. Banker

    Quote:
    “A number of resource rich countries are extremely poor.”

    Are you suggesting that if the UK didn’t need to import so much in the way of natural resources that it wouldn’t be less well off?

    Quote:
    “As to lack of space…”

    I assume this comment to be in response to my saying that the UK is way over-populated; I didn’t mean in terms of land space, I meant in terms of ability to feed itself; it doesn’t have a lot on offer to trade for food, let alone other natural resources. Hence the Trade Deficit.

    Quote:
    “The problem is high house prices…”

    One of them, yes. But who’s the biggest culprit for them? I’d say those rogues in ultra expensive suits who have hi-jacked markets and the playing-field.

    cont…

  13. 04/02/2013, Critic Al Rick wrote

    … cont

    Quote Banker:
    “The problem is high costs of manual labour…”

    In a free market prices are determined by supply and demand. If people can’t afford to live they can’t be available to provide labour. High costs of living necessitate correspondingly high wages.

    Train drivers have a Trade Union(s); Trade Unions are basically corrupt institutions, often operating on behalf of workers employed by other corrupt institutions. Hardly free market?

    Hedge Cutter earning £500/day. Well, if that be the case, I’d say he’s a rather special hedge cutter if 100% manual or one operating with an expensive bit of kit in which case a lot of the £500/day will be overheads.

    cont …

  14. 04/02/2013, Kerome wrote

    In fact these are all consequences of global rounds of price competition and cost-cutting, knock-on effects of the Internet and container shipping. When you outsource work to the cheapest countries and so optimise your knowledge economy, then cut prices, you are in effect deflating the size of the overall economic pie as people pay less for goods and services. Ultimately it all comes down to fundamentals – cost of base materials and cost of living of skilled employees. It’s no surprise though that the tech industry is in the middle of some hard-fought patent battles, one of the few safe havens for profit.

  15. 04/02/2013, Critic Al Rick wrote

    … cont

    In any case Banker a lot of people today don’t appreciate the nuances involved in working well manually (nor do some manual workers, I might add!). They are unappreciated by a load of graduated academic apprentices who consider themselves above getting their hands calloused and dirty – such attitude contributing to the downfall of the UK.

    Inasmuch as inventions are concerned, what proportion of the better remunerated than manual non-manual salary remunerated staff are inventors? They’re largely staff of pseudo cartels and virtual monopolies; think they’re worthy of a lot more remuneration than a manual worker. And so forth…

    Manual workers are largely doing something useful, a lot of the others, considering the bigger picture) are being destructive, if not immediately, in the longer term. How very clever. How very worthy of higher remuneration. I think not.

  16. 04/02/2013, Banker wrote

    I read your messages with interest. With egard to manual workrs being more useful then others – perhaps so when compared to some public sector employees – military especially. But ovrall educated, myself incuded, have to compete with the whole world. If my employer wanted to higher an indian to do my job in india – no problem, if they wanted to actually bring in Chinese to do my job also no problems and my salary does reflect that. While salaries of manual workes especially whee production is not asily portabe such as builders and transport are not globally competetive. They ar being subsidised by productive workers who are incrasingly getting fed up and moving away from this country – if such exodus continues Britain will be in HUGE hole.

  17. 04/02/2013, Critic Al Rick wrote

    Before responding to your post @16. I’d be interested to know exactly what you mean by “productive” in the context of “productive workers”.

  18. 05/02/2013, Nick name wrote

    I’m surprised to see NZ on the list as more expensive. I can only imagine they’re converting prices to a common currency to compare and the strong kiwi dollar is to blame for that. I lived there for a couple of years 6-7 years ago and it’s easily the cheapest and most pleasant place i’ve ever lived.

    If that’s the case though it really doesn’t say much for the UK, we have a weak currency and a high cost of living.

  19. 05/02/2013, Banker wrote

    @ 17. Critic Al Rick

    Perhaps in 16 I should have been clearer. By productive I mean those who are not wasteful publuc servants (and no not all public servants are but military, and many managers of trivial departments on £100k+ most certainly are) AND are competetive on a global scale. As it happens for highly skilled professionals UK borders are fully open hence those who are in the UK fully competetive with the whole world. The same could be said about skilled factory production workers to a certain extent as even though borders for such foreign workers are closed in theory production can be moved abroad. Wasteful professions are those like builders, transport workers etc – those are grossly overpaid purely because borders to foreign workers are shut AND what they do can not be shifted abroad …. but then who knows… in the future there might be remote contolled trains, ecscavators, bricklaying machines etc then those will see their time of reckoning.

  20. 05/02/2013, Nick Fury wrote

    Unions are not ‘basically corrupt organisations’; they are the most financially transparent organisations in the world, they represent the interests of their members; usually low paid and exploited, especially before unions existed. If it wasn’t for unions we would all be working 12-14 hours a day 6-7 days a week for a pittance, we are all living the benefits that the unions realised for us and they had to be battled for piece by piece, so be grateful for it, even though you never had to join one. Builders and the trades charge a fortune in labour costs (up to £100-£200 per hour in their quotes) and they are not in unions, so how come? because we are stupid enough to pay it (on the mortgage of course!) £5000 to replace a bathroom – it’s absurd!! it would cost a million pounds to build a terraced house if you paid these guys (and they want cash for it!)

  21. 05/02/2013, Critic Al Rick wrote

    @ Banker

    Ok, so your idea of a productive worker includes one who is competitive globally.

    My idea of a productive worker is one who is contributing positively towards a Balance of Payments Surplus either via being involved directly or indirectly in output from UKplc to the ROW or in self-sufficiency of UKplc negating the need of input from the ROW. There are, of course, degrees of productivity and of cost effectiveness.

    By implication my idea of an unproductive worker is one who is contibuting either nothing or negatively towards a Balance of Payments Surplus. There again, there are degrees of unproductivity and of cost ineffectiveness.

    So where does that place all of these highly paid, competitive international investment bankers? You know, the ones in the industry that is currently being held together by massive effective subsidisation by the Truly Private Sector incorporating some builders and some transport workers.

  22. 05/02/2013, Critic Al Rick wrote

    @ Nick

    What the Unions realised for us may include a huge loss of productive industry.

    Builders and the trades, as you quote, are mostly operating within a free market. Your example of cost of bathroom is not comparing like with like. It is easier to instal a bathroom as part of new build than it is to replace an existing bathroom – same applies to engines in cars; etc.

    I agree Unions have their place but that place has been over-stepped at times. I utilised “corrupt” in the context of ‘not always not lacking integrity’. So I aplogise – “basically corrupt” was rather strong.

  23. 05/02/2013, Banker wrote

    This puts most investment bankers into productive category. They are globally competetive with UK borders fully open for bankers from abroad and this is fully reflected in their salaries. Also Financial Services is a huge export market – with the City serving not just UK but a significant chunk of the world.

  24. 05/02/2013, Nick Fury wrote

    Thanks for the apology and I agree by reducing working class hours from 12-14 hours for 6-7 days per week, unions definitely did affect productivity, but their members quality of life was what mattered to them. UKplc cannot be run at the expense of the workers, but also for their benefit too. I agree house prices, petrol, utilities, etc are far too high and this is the main problem, but will they all unanimously drop their prices to accommodate us…I doubt it. One good thing (if there is one) about this ‘recession’ is that it will re-value quite a few things (even eventually house prices! & Equities? – who’s buying them; certainly not many individuals, maybe pension companies, overseas investors, etc). I can’t see inflation going on much longer (even with QE infinity – we’re just printing the money that was already on account as theoretical debit anyway). Next PLC £40 per share; Why? they own nothing; is good will worth that much!

  25. 05/02/2013, robin wrote

    Yes, but what about my essential point?

    Money flows in a cycle: employers->employees->consumers->retailers->employers.

    If companies collectively pay less to employees, then consumers have less money to spend affecting the companies income statements.

    I believe offshoring has had this effect not because I’m a protectionist, and believe in Uk first, but because, in india and china, industrialists have not passed profits on to employees so they can’t buy our produce.

    The solution in the past has been to drop money out of helicopters. The problem is a disparity between rich and poor.

    Also; companies have a mandate to act selfishly, but as long as they are governed effectively. Please don’t try to argue that this is the case currently. The multinationals have long since slipped their leashes, and their hunger for growth without consequence can theoretically halt the entire system.

  26. 05/02/2013, Nick Fury wrote

    Many restaurants 2 for 1 or 50% off or 2 for £10, constant sales in the shops & closures, even Supermarkets profits down, non-basics constantly on sale or sales falling, I’m inundated with phone calls & e-mails from PPI companies, investment companies and other businesses, etc. 50 inch TV’s for £400 & other cheap electrical appliances, more retirees and wives getting jobs ( & additional jobs) Times are hard and not getting better. All I see is a downward spiral; deflation in non-essentials and inflation in essentials; housing, utilities, petrol, etc.

  27. 05/02/2013, Critic Al Rick wrote

    @23. Banker

    I beg to differ.

    International investment bankers may be bringing money into the country now BUT how much of it, if not all of it and more, is negated by effective subsidies of one sort or another.

    Some of such subsidies could have been used to turn Budget Deficit into a Budget Surplus and therefore have been utilised to reduce the National Debt. Or taxation could have been reduced allowing Private Debt to be reduced more quickly.

    Or the subsidy money could have been utilised by the Govt to encourage greater self-sufficiency of UKplc thereby reducing money going out of the country.

    In my book, an industry effectively bringing no money into the country or doing nothing to negate money going out of the country is a non-productive industry; is a Parasitic Industry.

    Things could have been a lot different (no ZIRP, no QE, no ridiculous HPs) if it were not for the greed and ineptitude of bankers and politicians.

    The tail is wagging the dog.

  28. 05/02/2013, Banker wrote

    @ Critic Al Rick

    Many people believe what they want to believe.

    However the facts are:
    1. Most London banks received no bail outs from the UK while paying massive taxes to the UK.
    2. Those bailouts that did happen by UK government are actually likely to result in profits.
    3. QE is not done to please bankers. They do not have to many votes at elections. QE is done to appease home owning classes.

  29. 05/02/2013, Boris MacDonut wrote

    #28 Banker.
    HBos got £20 billion. Lloyds £17 billion. Bradford and Bingley £2billion. Northern Rock £4 billion. RBS £37 billion. Alliance and Leicester £1 billion. Allied Irish £16 billion.
    Barclays lied. They lent £11 billion to the “Qatari Government” and invested it back in their own gaping hole.
    Taxes paid by UK financial institutions in 2008 amounted to barely £4 billion. Methinks you have been a Banker for so long that any vestige of honesty has deserted you.

  30. 05/02/2013, Romford Dave wrote

    But it’s true, most banks didn’t receive a bail out.

    http://en.wikipedia.org/wiki/List_of_banks_in_the_United_Kingdom

    They may have benefited from the various schemes Western governments have employed to prop up their economies, but then that’s what bankers do, make money from money.

    It does seem a tad reminiscent of something the Iraqi Information Minister Mohammed Saeed al-Sahaf might have said if asked to defend a small group of banks who account for 99.99% of banking activity.

    Has anyone seen Comical Ali and Banker together in the same room…..?

  31. 05/02/2013, Boris MacDonut wrote

    O fcourse the problem is low wages. Low wages just affect the poor. Low prices are enjoyed by everyone, so help the rich too.
    I prefer the former as I’d hate to see the rich benefit any further.

  32. 05/02/2013, Critic Al Rick wrote

    @ 28. Banker

    As I understand it:

    1. a) If those banks that did receive bail-outs had not received bail-outs most if not all of the London banks would have taken massive hits.
    b) Banks pay little in corporation tax (1% ?). Most of the tax paid is employee related (IC, NIC). And if, as I’m given to believe, ongoing subsidisation of banks probably pays a lot if not all of investment banking salaries, then a lot if not all of those taxes are merely recycled tax; just like those taxes of Public Sector employees.

    2. I find it extremely hard to believe that the direct bail-outs which occured (RBS, NR) will ever result in an overall profit to the UK taxpayer; quite the contrary.

    3. a) QE not done to primarily please bankers – pull the other one.
    b) Democracy?!

    cont…

  33. 05/02/2013, Critic Al Rick wrote

    … cont

    @ Banker

    The likes of investment bankers are highly remunerated, not because they are productive (by my definition of productive) but because banks, etc effectively control governments.

    And if they are productive by your definintion of productive then it is because of the power afforded to them by their cartel like organisational structure. There is no real competition.

    But under globalisation your definition of ‘productive’ is correct; I don’t like it but it is correct. I’m afraid that parallel with globalisation will be a growing divide as the rich get richer and fewer and the rest get poorer and expand.

    This is the result of treacherous politicians feathering their nests whilst betraying those they are supposed to be representing by handing over ultimate control of currency to an evil elite.

    Yes, Britain will be in a HUGE hole.

  34. 05/02/2013, Banker wrote

    Northern Rock and Bradford and Bingley wre never investments banks even if you stretch definition of a investment bank to its very limits. Yes banks are paying little corporation tax these days as they don’t make much profit. BUT they pay huge amounts of money throgh employer’s NI, and thei employees though income tax and employee NI. Only “British” banks stood any chance of a bailout by UK government – yt there are lots of foreign bans in the UK. Even if you take a view that they transfer all their profits to their home countries without paying any Corporation Tax (which is simply not true) they pay LOTS and LOTS of tax through employee taxation. ……. Bailouts-wise well it could be argued that banks that did not get it still benefited from it. But how do you know you did not? May be if those bailouts did not happen you would not have a job too….

  35. 05/02/2013, Banker wrote

    Overall I am myself not too happy with the bailouts and huge moral hazad it creates. May be there was a case for some limited scale bailouts but then the reason for the bailouts is not because the gorvenment is in cartel with the bankers or loves bankers. It is because most politicians are home owners (and many land ownrs / multiple house owners) and had pesonal interests at stake. Also home owners are a large part of ACTIVELY VOTING electorate. That’s why A LOT more was done than was needed to just prevent systemic meltdown. This also what caused the cisis which is 99.9% the fault of central bankers who actively created asset bubles through grossly expnsionery economic policies even when th times were good and there was anbsolutely no need for expansionery policies.

  36. 06/02/2013, CT wrote

    “Why are prices in the UK so high and what can we do to bring them down?” I blogged on a potential rise in the minimum wage missing the point last week and answered this question. Read more here:

    http://thethompsonblog101.blogspot.co.uk/2013/01/why-raising-minimum-wage-misses-point.html

  37. 08/02/2013, StevieG wrote

    #31: You’re a Donut. Helping everyone is the way.

  38. 08/02/2013, StevieG wrote

    #31: You’re a Donut. Helping everyone is the way.

  39. 08/02/2013, StevieG wrote

    #31: You’re a Donut. Helping everyone is the way.

  40. 13/02/2013, Anssii wrote

    Wealth creating capacity has never been higher, and yet the majority seem not benefit, and if anything feel, or actually are, worse off.

    The problem clearly lies in the distribution of wealth whereby rents/land values suck up any gains in wealth creation. Under our current fiscal arrangements, making goods ‘cheaper’ by whatever mechanism will only result higher rents.

  41. 13/02/2013, Anssii wrote

    Replacing existing taxes and instead confiscating economic rent on unimproved land to be used for public spending will kill speculation in land, reducing land prices. With land prices/rental falling to their true fair value, more opportunities for people to work for themselves will open up, thus more people will only work for an employer if they’re better off by doing so. In these circumstances is probable that companies will start to complete for labour, rather than labour competing for the limited jobs available, and thus wages will rise.

    Under current arrangements almost any attempt to increase the return to labour will increase rent.

  42. 13/02/2013, Boris MacDonut wrote

    #37StevieG. I fear it is you that is a donut. Helping everyone is not the point when there is such inequality. Giving a millionaire £100 and giving a tramp £100 keeps the differential the same. So you need to give the tramp £1,000……..taken from the millionaire who won’t miss it.

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