How worker shortages are cleared will determine UK economy’s trajectory

You would be forgiven for forgetting we are currently amid one of the best runs of economic growth in living memory with all the negative news about supply chain snarl ups, worker shortages and soaring inflation flying around.

A slew of data published this week, alongside a raft of announcements from supermarket, retail and food bosses, show the effects of constrained labour and raw materials supply are emerging in the form of a lack of milkshakes, chicken bites and fewer punnets of strawberries.

Perhaps the most alarming of these warnings came from the chief of The Entertainer: “The range of toys available will shrink because we just won’t have the variety, as there will be so many items which are out of stock.” 

All very doom and gloom.

It is very much a workers’ market at the moment – see Waitrose offering lorry drivers more than back office executives – but how long this will last is a pertinent question for the long term trajectory of the British economy.

Bank of England will be alive to prospect of a wage-price spiral

Crucially, if wage increases become a longer term trend, then the prospect of inflation taking off will strengthen. There is strong evidence businesses are already passing on extra costs to consumers to protect margins, although this is having a negligible impact on sales due to demand in the UK economy running red hot.

Analysts have pegged expectations that pay surges will not last on the ample amount of workers sitting on furlough flowing into the labour market once the scheme winds down in a few weeks.

This large pool (or spare capacity, in economic jargon) of workers waiting on the sidelines should keep wages in check by making the jobs market more competitive between workers, diverting power back to employers in the process.

This is all well and good in theory, but what if furloughed workers take inspiration from the recent hike in lorry drivers pay and demand the same fillip? And what if they take the Bank of England’s word and expect inflation to reach four per cent by the end of the year? (For that matter, why shouldn’t key workers receive a pay increase?).

Whether these workers rejoin the labour market and accept pre-Covid pay packets is the number one priority for the Bank of England, thinks Thomas Pugh, UK economist at RSM.

“If inflation expectations start to rise – they’re already back to pre-crisis levels – and if this starts to be reflected in higher wage deals across the economy, the Bank of England will take notice and could act prematurely to tighten monetary policy.”

Should that scenario play out, the hallmarks of the dreaded wage price spiral will surface. And, if wages rise without a complementary increase in productivity, then it will plainly cost firms more to make things.

However, wage driven inflation could be tempered by consumers’ having better access to a greater number of sellers, thinks Martin Beck, chief economic advisor to the EY Item Club. 

“More competition as a result of globalisation and online activity makes it harder for firms to pass higher wages to customers via higher prices, and makes it more likely that if wage bills do rise, the cost will be borne in lower profit margins or efforts to improve efficiency.”

Hiking pay is not the only solution

Businesses need workers to function, and they are really struggling to find workers at the moment.

Data from the Recruitment and Employment Confederation shows new job ads jumped by nearly 200,000 in just a week at the end of August.

In response to severe worker shortages, they have been hiking pay to attract talent to help them capitalise on soaring demand after the end of most Covid restrictions.

The latest services PMI from IHS Markit shows record levels of hiring was largely achieved by firms ramping up starting salaries to lure candidates. Official data from the Office for National Statistics shows total pay jumped 8.8 per cent annually in the three months to June.

Scarcity is acute in the hospitality, leisure and retail sectors, which are struggling to find staff due to their usual cohort of workers, typically younger Brits and EU nationals, either moving out of the UK or heading back into education.

Reticence to leave furlough and find a new job at a pub or bar has strengthened on concerns over these roles’ long-term viability. Redundancies have been particularly high at these businesses, possibly prompting people to reassess their career goals. Others might just simply not like the working hours or are holding out for a better offer elsewhere.

But, good old-fashioned wage hikes should draw workers in, thinks Pugh: “In the very short term rising wages could just tempt workers to move from one firm to another.” 

However, it is clear employers are going to have to strengthen incentives to retain staff over the long-term as a result of the pandemic realigning many peoples’ values.

Martin Beck, chief economic advisor to the EY Item Club, agrees: “There are other mechanisms by which businesses could respond to a shortage of workers… includ[ing] using existing workforces more efficiently and training unqualified workers, changing shift patterns to make jobs more attractive and investing in labour-saving technology.”

Improving working conditions and mapping out clear career paths that offer discernable progression will also attract workers, Yael Selfin, chief economist at KPMG UK, stressed.

Where did all the drivers go?

A shortage of skills has been endemic throughout the UK economy for quite some time now.

The flight of EU nationals from the UK has exposed the pitiful level of qualified British HGV drivers, which has caused logistical nightmares for businesses up and down the country. 

Haulage chiefs estimate there is an around 100,000 shortfall of lorry drivers in the UK at the moment. And it may not be as simple as raising pay to clear this imbalance. “Where there are skill shortages, for example for HGV drivers, it will take time to get people trained up,” said Selfin.

From the UK side, haulage workers are typically older and well-seasoned in their role. But, the sector has struggled to attract new candidates for decades.

Younger workers have opted for work with more sociable hours, while the Covid crisis has disrupted training programmes, meaning distributing qualifications to drivers and getting them on the road has been delayed.

So, while worker shortages in the leisure and hospitality sectors may be a short-term problem, solved by increasing pay and the end of the furlough scheme, a lack of lorry drivers could be a more persistent thorn. 

And while labour supply will increase as government support is repealed, a significant proportion of those workers returning to the jobs market will not have the necessary skills to plug staff shortages.

Increasing the number of lorry drivers will be subjected to time lags due to labour supply being unresponsive to wage increases as a result of people needing training to work in the sector.

Targeting productivity gains is the answer 

Equipping people with skills and knowledge makes them more productive. 

If a greater share of the UK population has the means to improve their productivity, the economy will produce more with less, which will give businesses more cash to invest in creating new jobs, meaning they will not need to increase prices to offset higher costs.

But, like any investment, this will take time. The yields of such spending will not materialise in time to avoid empty shelves at Christmas.