British workers are securing a greater share of the nation’s economic output compared to pre-pandemic levels, reflecting a significant shift in bargaining power due to widespread labour shortages.
This newfound leverage has driven higher wages, reducing the proportion of profits retained by businesses.
Analysis of official statistics reveals that the wage share of the economy has climbed to its highest point since the early 2010s, excluding temporary pandemic-related anomalies. Conversely, corporate profit margins have been declining, as many firms have absorbed rising wages rather than fully passing costs onto consumers.
This trend provides reassurance to the Bank of England, which has been monitoring inflation closely. The central bank is searching for evidence that underlying inflationary pressures are easing, a critical factor in determining the pace of future interest rate cuts.
Paul Dales, Chief UK Economist at Capital Economics, noted that the current labour share could persist if wage growth stabilises above pre-Covid levels.
“It’s being driven by wage growth,” Dales explained. “Before the pandemic, wage growth was unusually low by historical standards, but it has since increased significantly and remains unusually high.”
The findings challenge claims of so-called “greedflation,” where firms were accused of exploiting high inflation to hike prices excessively during the peak of the energy crisis.
Instead, businesses and workers alike have been striving to recover losses caused by surging prices, first triggered by pandemic supply chain disruptions and later exacerbated by Russia’s invasion of Ukraine.
Labour shortages have amplified workers’ negotiating power, particularly in industries like construction and hospitality, where vacancies remain difficult to fill.
Wage growth surged to nearly 8% just over a year ago and continues to hover around 5%, with pay once again rising in real terms.
Government policies are expected to further tip the scales in favour of workers.
Last month’s budget from the Labour government introduced a significant increase in the minimum wage alongside a £26 billion hike in the national insurance payroll levy for employers.
These developments highlight the shifting economic dynamics in Britain, with workers gaining ground in the post-pandemic recovery as businesses grapple with tighter margins and sustained competition for talent.
