Not as bad as they seem to think

New data has revealed that employees are suffering painful real-term pay cuts as salary increases fail to keep up with the rate at which prices are rising, according to the take home pay indices to be published by the payments processor VocaLink.

Meanwhile the official rate of inflation, the consumer price index (CPI), hit 3.3pc in November – three times that rate of increase – and is expected to have remained on an upward path since then.

Both public and private wage growth nose-dived in the three months to December to an annual rate of 1.1pc, figures to be published this week show.

One interesting tidbit is that these numbers are calculated from take home pay, the post tax amounts that actually hit bank accounts.  So changes in income tax and NI are included in them.

But the larger point is that this is actually what we\’d like to see happening.

No, of course, declining living standards for those in employment is not desirable in itself. But the existence of structural unemployment is, in one view of economics, evidence that wages are too high as compared to the productivity of that labour. The market isn\’t clearing and thus prices have to change.

And as Mr. Keyens pointed out, people react very badly to reductions in their nominal wages: less badly to reductions in real wages which are brought about by inflation.

So, instead of the grinding internal devaluations in nominal wages which are the lot of places like Ireland, Spain and Greece, we\’ve had an external devaluation of the currency and the internal devaluation through inflation (part of which is of course caused by that external devaluation).

No, of course, we\’d all rather not be here at all but given that we are, devaluation and inflation are much less painful ways of going about it than the alternative.

2 thoughts on “Not as bad as they seem to think”

  1. The problem is, as you said about gilts the other day, presumably this ‘inflation tax’ isn’t working so well as it used to, given the inflation rate if more widely publicised. Furthermore we all wish it didn’t work at all (presumably, unless we think ignorance is a way to run a company/economy).

  2. Why don’t we just shoot everyone who voted for the Blair/Brown governments? It’s their fault after all.

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