Europe Economy

UK seeing a ‘massive adjustment’ in labor market, LSE director says

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Key Points
  • British businesses have been blighted by a combination of worker shortages and supply chain disruptions that have sent wages and prices skywards across a range of sectors.
  • The U.K. consumer price index climbed 2.1% in the year to July, above the Bank of England's target, having hit 2.5% in June, its highest reading since August 2018.
A lorry in Staffordshire, England.
Loop Images/Bill Allsopp | Passage | Getty Images

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, director of the London School of Economics.

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

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

The Bank has maintained that inflationary pressures are transitory but has raised its forecasts, and now expects inflation to peak above 3% by the end of the year before normalizing.

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

VIDEO1:3701:37
LSE director: We have to let the labor market do its job

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

British supermarkets have been promising truck drivers substantial wage increases in order to address a critical shortage, while evidence is mounting of labor cost increases across multiple key sectors of the economy.

The situation will have Bank of England policymakers on high alert, since a sustained increase in wage growth could lead to a more prolonged period of high inflation than currently projected.

Shafik suggested that as part of the "structural transformation," some sectors will grow rapidly while others will have to raise wages in order to recruit, arguing that "we have to let the labor market do its job."

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"When I was at the Bank of England, we were constantly waiting to see some movement in wages so that we could see some movement in inflation, so that we could raise interest rates, and it was like 'Waiting for Godot'," she told CNBC's Steve Sedgwick.

"Well we are finally seeing some wage increases and after a decade of stagnant wages, that is probably no bad thing."

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

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