The U.K. sees a ‘massive adjustment’ in the labor market

September 8, 2021: The U.K. is undergoing a structural overhaul in its labor market due to Covid-19 and Brexit, and policymakers should “let the labor market do its job,” according to Minouche Shafik, the London School of Economics director.

British businesses are blighted by a combination of worker shortages and supply chain disruptions that have sent wages and prices skywards across a range of sectors, which include haulage and logistics, care, and agriculture.

The recent increase in manufacturing costs and energy prices is expected to trigger a spike in inflation in the coming months. The U.K. consumer price index is increasing 2.1% in the year to July, above the Bank of England’s target, reaching 2.5% in June, its highest reading since August 2018.

The Bank maintains that inflationary pressures are transitory but has raised its forecasts and expects inflation to peak over 3% by the year-end before normalizing.

The former deputy governor of the Bank of England, Shafik, told CNBC at the European House Ambrosetti Forum for the weekend that she agrees with the prognosis of the central Bank.

“I find it so interesting that at the moment people are talking at the same time about skill shortages and how automation will make jobs disappear, so it is a very ironic moment, and I think what reflects is that we are in the middle of a huge adjustment in our labor market as a consequence of Covid and Brexit,” she added.

British supermarkets promise truck drivers substantial wage increases to address a critical shortage, while evidence is mounting of labor cost jumps across multiple key sectors of the economy.

The situation will be having Bank of England policymakers on high alert since a sustained increase in the growth of their salaries could lead to a more prolonged period of high inflation than projected currently.

As part of the “structural transformation,” Shafik suggested that some sectors will increase while others will have to raise wages to recruit, which argues that “we have to let the labor market do its job.”

“When I was at the Bank of England, we constantly waited to see some movement in the pays so that we could see some movement in inflation so that we could produce the interest rates, and it was like ‘Waiting for Godot,'” she told CNBC.

“Well, we finally see some wage increases, and after a decade of stagnant wages, that is probably no bad thing.”

She added that the current climate might also incentivize companies to invest in productivity enhancements, leading to a pickup in productivity.

“We should let it run till these structural changes play out, and then we see the amount of these will result in a permanent change in the price level, and if so, then we need to react monetarily.”