Two recent news items require attention. The first is that a lot of businesses in the United Kingdom expect to increase their prices in the new year. This is in response to the so-called national living wage which will come into force in April next year at a rate of £7.20.
The other news item is that household debt in the United Kingdom is rising at an alarming rate. The Daily Mail reports that:
... families are set to spend £40 billion more than they earn
this year.
In the depths of the crisis in 2009/10, families spent £67 billion less than they earned as they moved to cut their debts.
I recall that the recession of the early 1990s was preceded by a credit boom in the late 1980s when far too many families spent beyond their means.
But to return to the first news item. It is of course true that an increase in the minimum wage might lead to higher prices in the shops. The current minimum wage stands at £6.70, and so £7.20 represents an increase of less than eight percent - roughly equivalent to an increase of around five pence on the price of a bar of chocolate.
If a company's payroll amounts to forty percent of its total expenditure, then its overall expenditure will not need to rise by more than three percent to accomodate the rise in the minimum wage.
Where prices increase - and not all employers are threatening to increase their prices - then the British public can choose either to pay those higher prices or to reduce their spending. Given that the increase in the minimum wage will leave many working people better off, then maybe they will tend to pay the higher prices. By contrast, if people tend to reduce their spending rather than pay the higher prices, then the companies which raise their prices might have to lower them again in order to attract custom.
Another threat related to the living wage is that some companies expect to employ fewer people. Nevertheless some companies are already paying the living wage, and I'm not aware that any of them are laying off staff as a result.
I am far more concerned about the rise in household debt than I am about the living wage. I urge all readers of this blog to avoid any increase in their level of borrowing. Any increase in personal borrowing across the economy as a whole is likely to result at some point in an increase in interest rates, thereby making borrowing more expensive.
As a final point, I will repeat the comment left on the website of one national newspaper that the living wage is only decribed as a living wage by people who do not have to live on it.
Related previous posts include:
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