Power Shifts Toward UK Workers After Wage Squeeze on Profits

The UK's labour market has witnessed a significant power shift towards workers in recent years, driven by wage increases and a tight labour market. This trend, coupled with a squeeze on business profits, has reshaped the dynamics between employers and employees. This article explores the impact of recent wage increases on UK businesses and the potential implications for the labour market and economy.

The UK has experienced a surge in wages, with the annual growth rate of regular private sector pay reaching 8.1% in May to July 2023. This increase, coupled with a tight labour market, has put pressure on businesses' profit margins. The Office for National Statistics (ONS) reports that while labour costs have remained stable as a fraction of output in some industries, such as manufacturing, wage increases have contributed to output price growth in services sectors. However, the relationship between wage increases and productivity growth is complex. Despite a 0.6% fall in productivity in 2022, wages rose by 6.8%. This suggests that businesses may have absorbed some wage increases without passing them on to consumers, potentially impacting profitability.

Businesses have adapted their pricing strategies and cost structures to mitigate the impact of recent wage increases. According to the ONS, in February 2023, businesses were asked about the proportion of total input price rises passed on to customers. The results showed that businesses have been passing on a significant portion of their increased labour costs to consumers, with 59% of businesses reporting an increase in output prices if they also experienced an increase in input prices. This suggests that businesses are attempting to maintain their profit margins by adjusting their pricing strategies in response to wage increases. Additionally, businesses have been exploring other cost-saving measures, such as reducing purchases of inputs, substituting away from more expensive types of inputs, and increasing productivity.

Worker shortages and labour market tightness have significantly contributed to wage increases in the UK, particularly in sectors with high demand for labour. This increase in wages, coupled with rising input costs, has put pressure on business profitability. However, the pass-through of wage increases to output prices varies across industries. In manufacturing and some services industries, labour costs have remained stable as a fraction of output, while in other services industries, wage increases have been a significant factor in output price growth. Businesses have responded to higher labour costs by raising prices, reducing profit margins, or improving productivity.

The recent introduction of new worker rights, such as the right to request predictable working patterns, may further shift power toward workers, potentially driving further wage increases and impacting business profitability. The Workers (Predictable Terms and Conditions) Bill, set to receive Royal Assent, grants workers the right to request more predictable working patterns, potentially reshaping UK businesses' flexibility. This bill could benefit up to 2.4 million workers, particularly those on zero-hour contracts or with variable hours (ONS, 2023). However, it might also impact businesses' adaptability, especially those relying on atypical workers. Employers may need to adjust their scheduling practices, which could affect their ability to quickly respond to changing demands. Despite this, the bill could enhance job satisfaction and retention, ultimately benefiting businesses in the long run (Acas, 2023).

In conclusion, the power shift towards UK workers, driven by wage increases and a tight labour market, has significant implications for businesses and the economy. While businesses adapt their pricing strategies and cost structures to mitigate the impact of wage increases, the relationship between wage growth and productivity remains complex. New worker rights, such as the right to request predictable working patterns, may further shift power towards workers, potentially driving further wage increases and impacting business profitability. As the labour market and economy continue to evolve, businesses must remain adaptable and responsive to changing dynamics to maintain competitiveness and profitability.