‘Printing money’ could reduce real value of salaries

The Bank of England’s strategy of ‘printing money’, announced this week, will be good for employers because it could reduce wages in real terms, according to employment economists.

Last week, the bank used powers awarded by the government to start ‘quantitative easing‘ for the first time since the 1970s in a bid to create inflation.

Although inflation is usually seen as a bad thing for business, the strategy could end up reducing real wage bills, according to John Philpott, CIPD chief economist.

“A bit of inflation is good,” said Philpott. “That’s what quantitative easing is designed to do.”

If inflation increased and employees were locked into low pay settlements, employers could benefit, he added. “In the short term, that’s good news. Real wages will fall, and that could allow employers to create  more jobs.”

At the moment, wage increases are on the way down, according to figures from Personnel Today‘s sister organisation, pay specialist IRS, with one in four January 2009 pay reviews resulting in a 12-month pay freeze. Meanwhile, there was a sharp spike in the number of organisations postponing their scheduled reviews, according to the research.

Philpott said there was a case for freezing wages. “Given the situation in the labour market, there’s a case for freezing increases to all salaries, unless there are individual or organisational reasons to increase them.”

Marc Cowling, chief economist at the Institute for Employment Studies, added that an increase in inflation could be good for employers that have agreed near-zero pay awards.

“Employers could then take the opportunity to raise employment [levels] or increase hours,“ he said.

And even though employees would be getting less pay in real terms, firms should not worry about losing staff as a result.“The general feeling is that people will sit tight,“ Cowling added

A spokesman for public sector union Unison said: “Any measures that get the economy going again and prevent more job cuts are welcome.We have concluded pay deals for most of our groups… and future claims will take into account what is happening in the economy.”

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