UK's rising wages eat into companies' profits

JD Wetherspoon issued a profit warning on Wednesday in a further sign of how rising wages are starting to erode corporate profitability in the UK.

Shares in the pub chain fell sharply after it said it was increasing wages from this week, and its full-year profits would be lower as a result.

The tight labour market has prompted other companies, including Royal Mail and Ryanair, to warn recently that their profits are being hit by rising staff costs.

Shares in G4S, the security operator, also fell sharply on Wednesday after it blamed a hit to trading on tight labour markets, particularly in the Benelux countries.

The profit warnings reflect how salaries have finally started to rise in the UK after years of stagnation. Wage growth reached its highest level since the financial crisis in the three months to the end of August, with average weekly earnings, excluding bonuses, 3.1 per cent higher than a year earlier.

The rate of wage growth was the fastest since the recession that followed the financial crisis in 2008, and the first time the headline rate of pay growth has been higher than 3 per cent in a decade.

Meanwhile, the number of people in work is at a near-record high, and unemployment, at 4 per cent in August, is at its lowest point since the mid-1970s.

Neil Carberry, chief executive of the Recruitment and Employment Confederation, said recruiters were reporting significant rises in starting salaries.

“This is now feeding through to both pay settlements and government pay awards which are heading towards 3 per cent,” he said. “We’ve not seen this sustainably since before the financial crisis.”

Frances O’Grady, general secretary of the Trades Union Congress, said: “Workers have been suffering the longest pay slump in 200 years, while corporate profits have continued to hit record levels.

“And in companies like Wetherspoons, some staff are still paid less than the living wage, despite record profits.”

Although the share of corporate profits to national output has remained broadly stable since 2005, the net rate of return for private non-financial corporations rose in the three months to the end of June to 12.7 per cent, up from 12.5 per cent in the previous quarter, according to the Office for National Statistics.

So far, higher labour costs have not been passed on to shoppers. Consumer price inflation fell to 2.4 per cent in September from 2.7 per cent in August.

And, despite the recent pick-up in wages, once adjusted for inflation, they remain below their pre-crisis peak.

Bank of England officials have justified recent increases in interest rates on the basis that even small rises in wages could create inflationary pressure in the economy given the UK’s meagre productivity growth in the past 10 years.

Tim Martin, Wetherspoon chairman, said that after several years of record profits at the pub chain, “we are not immediately seeking to recoup these increased costs through higher pricing”. Shares in the pub operator fell 12 per cent.

The UK government’s national living wage of £7.83, which all employers are obliged to pay to workers aged over 25, is due to rise to £8.21 next year.

Concerns have been building among employers of low-skilled workers about their ability to attract employees without having to lift wages as the terms of Britain’s upcoming exit from the EU remain uncertain.

Mr Carberry at the Recruitment and Employment Confederation said Wednesday’s profit warnings should be seen in the context of high employment rather than Brexit.

“The long-term solutions, particularly for skilled roles, are about how we increase supply, especially in areas where there are real shortages, like healthcare professionals, IT or engineers,” he said.

When asked whether Brexit would make the UK labour market even tighter and push Wetherspoon’s wage bills up further, Mr Martin — a vocal Brexit supporter in the 2016 referendum campaign — forecast that would not be the case, as 90 per cent of the chain’s workers were British-born.

The CBI said that near-full employment in the UK underlined the need for businesses to access the skills and labour they required to succeed post-Brexit.

“This is vital for UK companies’ continued competitiveness with their international peers and requires an open and controlled approach to immigration,” it added.

Additional reporting by Andrew Whiffin and Gavin Jackson

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