There\’s a third option too

Couple that with surging inflation and the Austerian economy is a harsh place for workers: Incomes Data Services predicts that pay rises may average 3% this year in the private sector, while public-sector workers might be in for a 0.75% rise. Meanwhile, retail prices are rising by around 5% a year. The result, according to Capital Economics, is that household disposable incomes will be reduced by an average £500 this year. Or, as the governor of the Bank of England, Mervyn King, puts it: the biggest concerted squeeze in living standards since the 1920s.From here, there are two probable scenarios. The first is that families respond to the big squeeze by tightening their belts, and the economy takes a long time to limp out of its slump. The alternative is just as bad: the economy does recover, but only because Britons borrow a lot more.

Falling incomes also has another name. A fall in the price of labour.

When things get cheaper people usually end up buying more of them. So as British labour gets cheaper with respect to its output, people will hire more of it. You know, roughly what Germany has done over the past decade? Deliberately work to reduce labour costs?

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