A group of 67 economists has written to Boris Johnson to warn him he is “fighting the wrong battle” by trying to keep wages down, and risks plunging the UK into recession as a result.
The prime minister last week warned of a 1970s-style “wage-price spiral” fuelling inflation if pay packets were to increase in line with soaring prices.
But the economists – including academics from Oxford, Cambridge and London universities – said that the opposite was true, with the economy in need of additional household spending power to maintain demand.
The warning came as the Unite union released research suggesting that almost 60 per cent of recent price rises have been driven by excess company profits, compared with just 8 per cent due to labour costs.
In a high-profile speech in Blackpool last week, Mr Johnson said: “We can’t fix the increase in the cost of living just by increasing wages to match the surge in prices… If wages continue to chase the increase in prices then we risk a wage-price spiral such as this country experienced in the 1970s.”
His comments prompted today’s retort from the economists, who said that suppressing wages in the current economic climate was “the exact opposite of what is needed”.
It was “perverse” to blame workers’ pay for the current spike in inflation, which the Bank of England warned on Thursday could soon hit 11 per cent and which has been driven by supply chain disruption caused by Covid, war in Ukraine, global gas prices and excess profits, they said.
Government efforts to hold down wages “risk fuelling dramatic increases in poverty and hardship, and ultimately a recession”.
Instead, the economists argued, Mr Johnson should deliver “substantial” increases in the minimum wage, public sector pay and welfare benefits, which would inject demand into the sluggish economy as well as helping households cope with the cost of living crisis.
Meanwhile, the government should be fighting inflation by “using all the tools at its disposal to hold down energy costs, clamp down on excess profits and unblock global supply chains”.
Signatory Özlem Onaran, professor of economics at the University of Greenwich, said: “Workers’ pay rises aren’t causing inflation, and asking workers to pay for the cost of living crisis by capping their wage demands will only deepen the crisis.
“After a decade of wage squeezes, we need to change course, with a higher minimum wage, pay rises in the public sector, boosting social security and giving trade unions the power to negotiate decent pay rises for all workers.”
Jo Michell, associate professor of economics at the University of the West of England in Bristol, said: “There is no evidence that a wage-price spiral is driving inflation.
“Action should be taken to protect those on low incomes who are unable to cut back on food or fuel.
“Further real wage cuts will not resolve the crisis.”
Figures from the Office for National Statistics this week showed that real regular pay had fallen by 2.2 per cent in the period February to April, after inflation was taken into account. And average monthly pay actually fell in cash terms between April and May, despite high numbers of vacancies.
Official figures showed that the UK is teetering on the brink of recession, with GDP contracting by 0.3 per cent in April.
Unite’s analysis of FTSE 350 firms found profit margins were 73 per cent higher in 2021 than pre-pandemic levels in 2019, even though sales were down.
Even taking energy companies out of the calculation, average profit margins still jumped by 52 per cent.
Meanwhile, company profits jumped by 11.74 per cent in the six months from October 2021 to March 2022, while labour costs fell by 0.8 per cent over the same period, after inflation is taken into account.
Unite general secretary Sharon Graham said: “The weight of evidence shows that the UK is in the grip of a profiteering crisis. Workers’ wages and what they can buy are being squeezed by corporate wreckers pursuing runaway profits, quite literally at our expense.”
A government spokesperson said: “We have a plan to combat inflation through independent monetary policy, alongside responsible fiscal policy, and boosting our long-term productivity and growth.
“To help families with the challenges they’re facing, we are providing the 8 million most vulnerable British families with at least £1,200 of direct payments this year, with additional support for pensioners and those claiming disability benefits.
"We have also increased the National Living Wage by £1,000 a year for a full time worker, plan to save the typical employee over £330 a year through a tax cut in July, and have changed Universal Credit to make sure people keep £1,000 more of what they earn.
“We are committed to creating a high-growth, high-wage economy, but it is important to tackle the underlying causes of inflation rather than simply spending more.”