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Economic balance

The economic conditions granting workers rising salaries are also raising their interest bills. By Gary Duncan, Economics Correspondent

For the individual, accelerating wage growth solves all manner of ills. For the country, however, it creates headaches. Rising wages stimulate spending which, in turn, encourages the price rises which lead to high inflation and economic discomfort.

Hence the gloom with which many greeted this morning’s unemployment figures. “What will slow consumer spending and housing market activity? Higher interest rates,” warned John Butler, the HSBC economist.

There may be fewer people out of work, the lowest number of dole claimants since 1975 and rising numbers of job vacancies, with wage growth at 4.3 per cent in April, its strongest level for two years. But such statistics only stress the need to raise borrowing costs further, even after four rises in the last seven months.

In fact, it is surprising that years of low unemployment have not fed earlier into wage inflation. It is a measure of the power of globalisation, and the threat of work going to low-cost economies abroad, the dread “outsourcing”, that salary rises have stayed well below the 4.5 per cent level which attracts Bank of England concern.

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It is also a reflection of the lasting benefits of the 1980s labour market reforms, and the limited impact of the employee-focused reforms, such as the minimum wage, introduced by the Blair Government.

Still, for the economy, this morning’s statistics only reinforce the case for raising borrowing costs.

Among individuals, the wise, or fortunate, will be those that lower borrowings to enjoy the full benefit of their expanding wage packets.