The workers have won a pay rise – that means big changes for the economy

Rising wages in Britain mean big changes for our economy. Matthew Lynn explains why, and looks at five trends to watch in the coming months.


The real surprise is the resurgence of M&S

The workersare gettingpoorer. The middle classes arebeing squeezed.The super-rich are getting wealthier and corporations are taking a bigger share of the pie. Over the years since the financial crash, that narrative on the economy has become very well established. And there was some truth in it. Through the deep recession of 2008 and 2009, real wages really did get squeezed. But it is not true any more.

The latest figures make it abundantly clear that real wages are now growing at a healthy rate. Last week, we leaned that earnings are going up at an annual rate of 3% a year. Add in deflation of 0.1% and prices are falling a lot more even than that in areas such as petrol, food, and eating out and it is clear that people have much more money in their pockets.It remains to be seen whether the risein real wages can be sustained.

If there is another sharp recession, and unemployment soars again, it might well splutter out. But if the economy can keep growing at 2%-plus, and if unemployment carries on coming down as fast as it has been, then wages are going to keep on rising, and should do so for several years. That is, of course, good news for anyone who works for a living. And for the government too those presiding over such good times tend to get re-elected, even if the main opposition party hadn't decided to self-destruct. But it also means big changes for our economy. Here are five trends to watch.

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1. More robots

Robotics is already taking off as the technology advances to the point where many routine tasks can be mechanised. We should expect to see a lot more of that over the next few years. If you don't like self-service scanners at the supermarket or pay-at-the-pump filling stations, then get over it. There will soon be lots more of them. At £10 an hour or more, shops are not going to want to pay for lots of people to calculate the cost of your shopping for you.

Indeed, the rise in the price of labour may well have come at precisely the right time for the emerging robotics industry. Especially in the staff-heavy service industries, where labour costs can account for 60% or more of operating costs, we can expect to see a drive to make systems more efficient.All those baristas can't be cheap.Expect money to be poured intoreplacing them with machines.

2. More investment

Over the last few years, the rate of investment has been dismal. Companies have been very reluctant to spend their cash upgrading plant and equipment, preferring to pay it out in dividends, or on stock buy-backs instead. Who can blame them? If they needed stuff done, they could just hire more people to do it very cheaply. Robots cost money, and so will any other kind of capital equipment that makes a business more efficient to run. But with staff becoming more expensive, investing in machines is suddenly going to look a lot more attractive than paying a higher dividend.

3. Higher productivity

The UK's recent record on productivity has been terrible. People are not producing much more than they used to, and that makes it harder for their employers to pay them more. The reason is probably the same as that given above. Why would companies worry about productivity when labour is so cheap? As companies start to invest more in machines, expect productivity to start rising again. With any luck that will create a virtuous circle of rising output, which will pay for higher wages.

4. Consumers will go shopping

All those workers earning more will have more money every month. Inevitably, sky-high housing costs will eat up some of that. But not all of it. There will still be quite a bit left over to spend at the shops and online. The high street may well get a reprieve from its often forecast death sentence, at least temporarily.The discounters, chains such as Aldiand Poundland, which did really well as the consumer was squeezed, may findlife a bit tougher as customers stop watching every penny.

The real surprise might be a resurgence of the mid-market companies think M&S or Debenhams, and all the stuff sold in those shops.The squeezed middle abandoned them for the discounters, and the really wealthy never shopped there anyway. Now they could be on the way back.

5. Workers will job-hop

In a tight labour market, workers have a lot more power. In the past, that might have meant stronger trade unions or campaigns for more rights for employees. These days that is all a bit old hat.

To Generation Y, it is likely to mean more job-hopping, and more quarter-life career breaks. That in turn will mean more and more lavish perks, such as those we are already seeing in the tech industry (Netflix offers unlimited maternity leave, and Facebook has free sweets in the office shop). Companies will have to start competing for staff again. They will do that partly through higher wages, but also through more generous perks.

In any economy, the cost of labour is one of the most fundamental factors. It determines how businesses operate, which ones do well, and how much money people have to spend. All that is on the brink of major change.

Matthew Lynn

Matthew Lynn is a columnist for Bloomberg, and writes weekly commentary syndicated in papers such as the Daily Telegraph, Die Welt, the Sydney Morning Herald, the South China Morning Post and the Miami Herald. He is also an associate editor of Spectator Business, and a regular contributor to The Spectator. Before that, he worked for the business section of the Sunday Times for ten years. 

He has written books on finance and financial topics, including Bust: Greece, The Euro and The Sovereign Debt Crisis and The Long Depression: The Slump of 2008 to 2031. Matthew is also the author of the Death Force series of military thrillers and the founder of Lume Books, an independent publisher.