Wage Inflation

[underpressuretobuy]

Apologies if people find this a silly / ignorant question but....

My parents' generation had the value of their mortgages eroded by wage inflation and understandably my parents are adamant that if I bought now the value of my mortgage would be eroded by wage inflation in the future.

Can anyone tell me what caused wage inflation from about 1970 onwards?

Can anyone tell me why they think wage inflation will not happen in the future?

Can anyone tell me what economic circumstances need to be in place or need to change in order for us to see a return of wage inflation in the future?

Many thanks,

UPTB

[karhu]

Can anyone tell me what caused wage inflation from about 1970 onwards?

Can anyone tell me why they think wage inflation will not happen in the future?

Inflation was running at very high levels at some points during the last 30 years. Unions and strikes made sure that people's wages kept up.

Now with the global economy competition from 'cheaper' economies can be used to maintain low wage growth in UK. Margaret Thatcher did away with the unions and Tony Blair has done nothing to reverse this situation.

What will make wage inflation return?

Social unrest and the return of a unionised system. Not likely in the foreseeable future.

Edited February 6, 2006 by karhu

[AteMoose]

Average Wages will match the average value of the uk population in relation to the rest of the world, our wages are over valued, globalisation will ensure wage inflation stays low...

[underpressuretobuy]

Inflation was running at very high levels at some points during the last 30 years. Unions and strikes made sure that people's wages kept up.

Now with the global economy competition from 'cheaper' economies can be used to maintain low wage growth in UK. Margaret Thatcher did away with the unions and Tony Blair has done nothing to reverse this situation.

What will make wage inflation return?

Social unrest and the return of a unionised system. Not likely in the foreseeable future.

Isn't it possible that people's natural reaction to very high levels of inflation might be social unrest and the return to trade unions?

Therefore if the factors that make unions popular were to return might not the unions and all that went with them return?

I mean its important because if you are taking a bet against wage inflation happening aren't you taking a bet against social unrest and the return of the unions?

In other words you are betting against people behaving in a certain way.

Do we really want to take a bet that there won't be social unrest in the future, the way things are going I am not so sure.

It is easy to forget that one of the biggest public demonstrations ever to occur in this country has happened in recent memory with the protest against the Iraq war in London.

Perhaps it simply isn't true that we are more apathetic now and perhaps if inflation were to really kick off, as it could with high oil prices, we would see a return of social unrest and unions.

Average Wages will match the average value of the uk population in relation to the rest of the world, our wages are over valued, globalisation will ensure wage inflation stays low...

How can you estimate the average value of the UK population in relation to the rest of the world?

What made the UK population so valuable in the 1970s as to cause wage inflation?

[karhu]

Isn't it possible that people's natural reaction to very high levels of inflation might be social unrest and the return to trade unions?

Therefore if the factors that make unions popular were to return might not the unions and all that went with them return?

It is highly unlikely because the UK government, over the last 15 years, has broken down society thereby making us much more likely to compete than cooperate with one another. Remember this:

Epitaph for the eighties? 'there is no such thing as society'

"I think we've been through a period where too many people have been given to understand that if they have a problem, it's the government's job to cope with it. 'I have a problem, I'll get a grant.' 'I'm homeless, the government must house me.' They're casting their problem on society. And, you know, there is no such thing as society. There are individual men and women, and there are families. And no government can do anything except through people, and people must look to themselves first. It's our duty to look after ourselves and then, also to look after our neighbour. People have got the entitlements too much in mind, without the obligations. There's no such thing as entitlement, unless someone has first met an obligation."

Prime minister Margaret Thatcher, talking to Women's Own magazine, October 31 1987

The HPC website breaks the mold here.

[Bingley Bloke]

It is highly unlikely because the UK government, over the last 15 years, has broken down society thereby making us much more likely to compete than cooperate with one another.

Sadly true. What I would like to see is the whole lot of us standing up and making some noise about council tax, gas bills, petrol duty and other rip-off Britain issues, but people in this country don't unite the way others, such as Muslims, do when they feel they are being mistreated. We just bite our lip, bend over, and allow the shafting to continue. We're pathetic. Noone stands up because they're afraid that noone else will. I'd be all for a national strike starting tomorrow and lasting a month if it were up to me. It's all well and good saying our wages will ultimately align themselves with that of the rest of the world, but for that to happen living costs have to as well.

[AteMoose]

Isn't it possible that people's natural reaction to very high levels of inflation might be social unrest and the return to trade unions?

Therefore if the factors that make unions popular were to return might not the unions and all that went with them return?

I mean its important because if you are taking a bet against wage inflation happening aren't you taking a bet against social unrest and the return of the unions?

In other words you are betting against people behaving in a certain way.

Do we really want to take a bet that there won't be social unrest in the future, the way things are going I am not so sure.

It is easy to forget that one of the biggest public demonstrations ever to occur in this country has happened in recent memory with the protest against the Iraq war in London.

Perhaps it simply isn't true that we are more apathetic now and perhaps if inflation were to really kick off, as it could with high oil prices, we would see a return of social unrest and unions.

How can you estimate the average value of the UK population in relation to the rest of the world?

What made the UK population so valuable in the 1970s as to cause wage inflation?

Easily, by the average value of the people who come here to work how many hours they do, and what they will work for, I know SAs, and eastern europeans. The eastern Europeans think nothing of haveing multiple jobs and working upwards for 50 hours a week (and one girl i know worked 100 hours a week, split accross 4 jobs for a short period of time doing well paid nasty jobs the uk population didnt want to do, she sends 1000ukp out of a the country every mounth). Most share houses and often rooms to cut costs, working nights and having other jobs in the day. They see the UK as an expensive gold mine, and the UK population as lazy (average salary in Slovakia is about 300ukp a mounth and jobs are scarce). The young population is well educated, dedicated and hard working, but they know how to party and drink

In the 60/70s other countries were richer than the uk, and we were undervalued.

Edited February 6, 2006 by moosetea

[Mushroom]

What made the UK population so valuable in the 1970s as to cause wage inflation?

So much more of our goods and services were produced "in house".

Anecdotal, I realised much was changing in 1980 when we were being shown round an hydro electric power plant in New Zealand. I noted that the turbines had been made in Hungary. I would have expected them to have been Uk made. I was told the Hungarian ones were cheaper and as good. Now I know that was Soviet bloc times and those turbines were probably "subsidised".

That incident coupled with factors like the increase in Japanese imports to the UK made me realise that things were changing with regard to what was happening to World trade.

I could see that the UK as "workshop to the World" was going to go.

Back then many were still employed in large factories, which many here will have no experience of.

[underpressuretobuy]

Easily, by the average value of the people who come here to work how many hours they do, and what they will work for, I know SAs, and eastern europeans. The eastern Europeans think nothing of haveing multiple jobs and working upwards for 50 hours a week (and one girl i know upto 100 hours a week, split accross 4 jobs), sharing houses and often rooms, working nights and having other jobs in the day. I know o... They see the UK as an expensive gold mine, and the UK population as lazy (average salary in Slovakia is about 300ukp a mounth and jobs are scarce). The young population is well educated, dedicated and hard working.

In the 60/70s other countries were richer than the uk, and we were undervalued.

I am still not convinced, surely the 60s and 70s saw young people from India, Pakistan and the Caribean coming to the UK and surely they worked just as hard to make a life here. Although the country of origin has changed I don't see the difference.

Can you tell me which countries were valued higher than the UK in the 60s and 70s?

So much more of our goods and services were produced "in house".

Anecdotal, I realised much was changing in 1980 when we were being shown round an hydro electric power plant in New Zealand. I noted that the turbines had been made in Hungary. I would have expected them to have been Uk made. I was told the Hungarian ones were cheaper and as good. Now I know that was Soviet bloc times and those turbines were probably "subsidised".

That incident coupled with factors like the increase in Japanese imports to the UK made me realise that things were changing with regard to what was happening to World trade.

I could see that the UK as "workshop to the World" was going to go.

Back then many were still employed in large factories, which many here will have no experience of.

Good point. So basically you are saying that the state of British manufacturing is such that wage inflation will not return?

[MarkG]

Isn't it possible that people's natural reaction to very high levels of inflation might be social unrest and the return to trade unions?

Sure, but that will just encourage companies to outsource faster.

I honestly don't understand why a sane company would set up in the UK these days. Expensive, overtaxed, overregulated and turning into a police state: about the only good things I can think of are that we speak English and goods manufactured here avoid protectionist EU tarrifs.

It's all well and good saying our wages will ultimately align themselves with that of the rest of the world, but for that to happen living costs have to as well.

And they will... eventually.

Edited February 6, 2006 by MarkG

[munro]

The difference is simply between a local and a global economy. In a local economy people/trades/businesses are interdependent and asset prices are coupled to local prices/wages. In the 1970s the British economy was still more or less a local economy.

In a global economy a decoupling occurs between different elements of the system. Anything that can be imported is subject to different sorts of cost pressures. Cheaper goods from eg China undercut local manufacturers who go out of business, but if the money is reimported as capital and lent out then asset prices can remain high. Which is why anything that can be supplied on the basis of a cheaper cost basis goes down in price - meaning manufactured goods and any service sector jobs that can be effectively exported, that is, filled by people from poorer countries whose wage demands are aligned with wages in their countries of origin rather than the country they work in.

House prices have remained high in this country because this decoupling effect has been obscured by a combination of wishful thinking and a short timescale. The true effects of this are just beginning to kick in and will become more pronounced in the next 5-10 years.

This is also why it's just pointless criticising the local workforce, whose cost base is geared to asset prices in their own country, for being lazy. What matters is the rewards for work, and it is manifestly obvious that in this country unless you're in the upper echelons of whatever-it-is the rewards for work are b*gg*r all and falling.

[MarkG]

What matters is the rewards for work, and it is manifestly obvious that in this country unless you're in the upper echelons of whatever-it-is the rewards for work are b*gg*r all and falling.

Indeed. When the average salary won't even cover buying the average house without taking huge financial risks, what's the point of working? I'm sure the British people would be far less 'lazy' if there was a country they could move to with no immigration hassles, work all hours of the day, party at night and be able to ship home 5,000 pounds a month after paying their living costs.

[paradox]

What has changed is that the world market has become far more global. Capital can now move freely around. Mrs Thatcher removed capital controls.

Before, it was impossible for company to up sticks and go elsewhere. Once they were invested in the UK all sorts of regulations prevented them from moving their capital. Now they can do a moonlight flit if they want to.

Technology also makes a difference, outsourcing is much easier as it doesn't matter so much where people are based. Who would have thought of Indian call centres servicing the UK ??

UNFORTUNATELY, it means that we are stuffed. Our cost of living is high, our wage expectations are high, but we just don't cut it anymore.

Even if we unionised and went on strike - who would care? The few big manufacturing joints that are left in the UK would move abroad. We have some niche markets but there is little to keep capital in the country (apart from the casino of the City of London).

Our demise has been delayed by the bubble in property prices giving a sense of wealth and shielding us from the impending gloom. We have all shopped until we drop and this has kept us in a job (and brought over loads of Polish plumbers).

Have you ever been to Shanghai? Kuala Lumpur?

I was in KL recently. Kinda knocks your breath away.

I am sorry, the only way is DOWN for the UK really. A long drawn out slow decline. London, tourism, and the image of the premier league and the pop stars will help to slow it down. But we are going to be one big theme park in the medium term. With islands of high performing value added industries surrounded by a sea of dross.

Have you ever been to Conisborough, Wath on Dearne? Poor, white ex mining areas with 20% plus on incapacity benefit. Lots of young idle men. Why aren't they all in London competing with the Polish plumbers?

The fact that they are not shows the way we are heading.

Edited February 6, 2006 by paradox

[Mushroom]

Good point. So basically you are saying that the state of British manufacturing is such that wage inflation will not return?

Yes, I am. The large workforces in those factories were unionised and often "closed shops" and employers spent much time with union representatives in "wage bargaining" sessions.

Now, how many people work in units of several thousand with all belonging to a trade union?

Those were also the days of a skills hierarchy and wage differentials were sacrosanct. So if any level received a pay rise the level above demanded one and so on up. "We have to maintain differentials".

They were vastly different days. The electrician wouldn't dare to do anything that was the province of the mechanical fitter and vice versa. "Flexible workforce" was not on the radar.

That phrase "One out all out" is hardly relevant now in any area of work.

Also of importance, I feel, is that now people are more likely to consider the effects of any form of industrial action on themselves and their own rather than the larger group to which they belong. Group loyalty has mainly gone.

[apom]

Apologies if people find this a silly / ignorant question but....

My parents' generation had the value of their mortgages eroded by wage inflation and understandably my parents are adamant that if I bought now the value of my mortgage would be eroded by wage inflation in the future.

Can anyone tell me what caused wage inflation from about 1970 onwards?

Can anyone tell me why they think wage inflation will not happen in the future?

Can anyone tell me what economic circumstances need to be in place or need to change in order for us to see a return of wage inflation in the future?

Many thanks,

UPTB

Wage inflation followed each housing boom.

House prices have always swung around 4 times average salary.

Wage inflation allowed the housing boom to be caught up with, houses again became affordable.

Those overstretched could see their salary increase, effectivly lowering the true cost of their mortgage.

in 1989 there was no wage inflation to bring an end to the boom and we saw house prices drop. I.e they became affordable again.

Should you be suprised that something that is not affordable needs to become affordable?

If so how does it become affordable?

Mervin King and the MPC have said that there will be a rise in IR's if wage inflation went over 2.5%

Wage inflation did follow a housing boom, but then a recession followed.

Companies cannot survive suddenly paying more and more to their employes.

after 1989 there was a small recession in the early 90's, but no where near the scale of previous ones.

So... Wage inflation damages the country. The MPC have promised for years that they will battle this to protect the economy.

They have said how (raising interest rates)

Mervin King warned three years ago that as soon as people realised that there would be no wage inflation to pay of their mortgages that property prices would crash.

some need wage inflation to help with their mortgages.

Some believe that wage inflation would help them buy a property.

The country will not allow it to happen.

So what happens to house prices in this situation?

Well look back to last time..

Where inflation was kept low.

We have been promised this time and time again by those who govern inflation.

Edited February 6, 2006 by apom

[MarkG]

Why aren't they all in London competing with the Polish plumbers?

Because working all hours of the day to save a thousand pounds a month is not a viable long-term strategy in this country. You'll kill yourself working that hard and save peanuts compared to our living costs... if house prices 'stabilise' you'd have to work without a break for fifteen years to pay for the average house, whereas Eastern Europeans can probably go home rich by their standards after two or three.

[Mushroom]

Have you ever been to Conisborough, Wath on Dearne? Poor, white ex mining areas with 20% plus on incapacity benefit. Lots of young idle men. Why aren't they all in London competing with the Polish plumbers?

The fact that they are not shows the way we are heading.

A question I also ask. Which leads me on to ask why the Government seems to have no effective answer to this situation. Then I ask, perhaps it doesn't want to?

[Gravity's Rainbow]

I live in the south-east/M4 technology corridor. Going by the local newspaper's jobs section there are plenty of jobs vacant, many of them for unskilled workers. Wages aren't too bad either. For instance, warehouse workers seem to start on 18K a year, which is about 4K more than similar jobs I saw being advertised in East Anglia a few weeks back.

I doubt that rates of unionisation are better down here. Wages are better because the cost of living is so much higher. Firms have to offer decent money to get good workers. High staff turnover costs companies money, and as the cost of living goes up the pressure on wages to rise also increases.

I have no doubt that the massive increase in housing costs over the last few years will lead to big recruitment problems for UK businesses, especially for skilled and semi-skilled workers in the service sector. This is already in evidence in the public sector in the south.

I forsee a large chunk of UK graduates finding themselves saddled with debts and priced out of the housing market deciding to emigrate for a better standard of living. A migratory outflow of sufficient scale would lead to skills shortages in the UK and cause rapid wage inflation.

Wage inflation is one way that the imbalances in the wider economy caused by huge HPI will work itself out.

[Solvent Celt]

Wage bargaining power ceases to exist when there is a limitless source of cheap labour available by immigration.

The irony is that todays Unions have been the most vocal pro-immigration groups - unlike in the early days of mass immigration when the unions came out in protest.

Unskilled and semi skilled Britons are going to have to face permanent minimum wages.

[Tent]

Wage inflation will occur but not necessarily in this county. If the influz of Polish workers are sending wads of cash home then that will only serve to stoke up inflation in these contries and push up wages in these countries making it less desirable to work here longer term.

[MarkG]

Which leads me on to ask why the Government seems to have no effective answer to this situation. Then I ask, perhaps it doesn't want to?

Welfare cases are natural Labour voters: the more people they can make reliant on government, the better. Why do you think they introduced 'child tax credits' that even many middle-class voters can claim?

[underpressuretobuy]

What has changed is that the world market has become far more global. Capital can now move freely around. Mrs Thatcher removed capital controls.

Before, it was impossible for company to up sticks and go elsewhere. Once they were invested in the UK all sorts of regulations prevented them from moving their capital. Now they can do a moonlight flit if they want to.

Technology also makes a difference, outsourcing is much easier as it doesn't matter so much where people are based. Who would have thought of Indian call centres servicing the UK ??

UNFORTUNATELY, it means that we are stuffed. Our cost of living is high, our wage expectations are high, but we just don't cut it anymore.

Even if we unionised and went on strike - who would care? The few big manufacturing joints that are left in the UK would move abroad. We have some niche markets but there is little to keep capital in the country (apart from the casino of the City of London).

Our demise has been delayed by the bubble in property prices giving a sense of wealth and shielding us from the impending gloom. We have all shopped until we drop and this has kept us in a job (and brought over loads of Polish plumbers).

Have you ever been to Shanghai? Kuala Lumpur?

I was in KL recently. Kinda knocks your breath away.

I am sorry, the only way is DOWN for the UK really. A long drawn out slow decline. London, tourism, and the image of the premier league and the pop stars will help to slow it down. But we are going to be one big theme park in the medium term. With islands of high performing value added industries surrounded by a sea of dross.

Have you ever been to Conisborough, Wath on Dearne? Poor, white ex mining areas with 20% plus on incapacity benefit. Lots of young idle men. Why aren't they all in London competing with the Polish plumbers?

The fact that they are not shows the way we are heading.

This does kind of suggest that you see the recent boom in the UK economy as some kind of last party of unprecedented extravagance before an eternal miserable hangover.

I remain, however, a little unconvinced.

People have been predicting the demise of the UK economy for years saying, quite rightly, that it doesn't have any assets to justify its position in the world.

Nevertheless the UK continues to defy economic and political (in terms of world politics) gravity.

I guess I view the UK economy the same way as I view the Conservative party, a few years ago some people were saying the Conservative party were finished. Leaderless, divided and with an aging membership literally dying off, people were saying that this political force was dead, killed by Thatcher no less. But I have always been of the opinion that you should never underestimate the Conservative party (I am not a supporter of the Conservative party, just stunned by their ability to bounce back time and again) and sure enough since the election of David Cameron people are yet again talking about a Conservative government.

I digress slightly, but my point is that the UK has a habit of bouncing back when by rights it should not be able to do this.

[apom]

again.

The MPC are aware of this.

if it goes past 2.5% IR's will go up..

they have said this people

[MarkG]

sure enough since the election of David Cameron people are yet again talking about a Conservative government.

But Cameron isn't a Conservative: he's Tony Blair Lite, and if he gets elected it will be because people have had enough of Labour for a while, not because they want him.

[paradox]

QUOTE

Why aren't they all in London competing with the Polish plumbers?

Because working all hours of the day to save a thousand pounds a month is not a viable long-term strategy in this country. You'll kill yourself working that hard and save peanuts compared to our living costs... if house prices 'stabilise' you'd have to work without a break for fifteen years to pay for the average house, whereas Eastern Europeans can probably go home rich by their standards after two or three.

Exactly. I am not criticising my fellow Yorkies or calling them lazy. I agree that it is probably not worth their while given the UK cost of living.

This does kind of suggest that you see the recent boom in the UK economy as some kind of last party of unprecedented extravagance before an eternal miserable hangover.

I remain, however, a little unconvinced.

In some ways I hope you are right. On the other hand the more I travel the more I think that we ARE declining relative to other parts of the world and have been doing so since the 1945. It is just a very, very sloooooow process.