Real Wages in UK

By Tejvan Pettinger on September 15, 2011 in economics

Real wages show the value of wages adjusted for inflation. Real wages are thus a guide to how living standards have changed. For example if nominal (actual) wages increased 5%, but inflation was 5%. This would mean the purchasing power of your wages had stayed the same. The net effect would be the same as a wage freeze (0% increase, and inflation of 0%.

Inflation and Nominal Wages UK

ukeconomy

Regular Weekly Pay

Source: ONS

UK Inflation

Source: ONS

Real Wages = Nominal Wages – Inflation

These show that we are experiencing a rare period of negative real wage growth. Nominal wages are growing by 2.2%, but, we are experiencing CPI inflation of 3.7% (RPI is even higher). Therefore real wages are effectively falling by 1.5%

This shows that living standards are effectively falling. Consumers are able to buy a smaller selection of goods and services, therefore, there is likely to a squeeze in spending on expensive ‘luxury items’.

Furthermore, UK unemployment has been rising and the number who are economically active have fallen in recent years.

Inflation and Inflation Expectations.

One important consequence of the data on nominal wages is the fact workers are unable to bargain for higher wages in response to inflation.

Usually a higher inflation rate leads to unions demanding nominal wage increases to compensate for the rise in living costs. If inflation rises, nominal wages rise by even more to maintain real living standards.

However, in the current climate of high unemployment, low growth and high spare capacity, unions are unable to bargain for higher wages. Firms are able to keep wage growth low.

This means that the rise in inflation, due to cost push factors, is more likely to be temporary. If the current rise in inflation did lead to higher wages, the Bank of England should be much more concerned about long term inflation. However, it appears that rising prices are not leading to wage push inflation.