Got a staff shortage? Raising wages normally helps

Consequences of a low pay, low investment economy? 

Owl’s view has always been that moving to a high wage economy is the way to improve productivity (and improved standard of living).

Larry Elliott

From Michel Roux Jr to Tim Martin, from swanky Le Gavroche in London to Wetherspoons pubs, the message is the same: we need more staff. Labour shortages were not a problem envisaged when the UK was plunged into lockdown in the spring of 2020. Then, the fear was of massive job losses and the highest unemployment since the 1930s.

Now, the hospitality sector says a lack of chefs, bar staff and waiters is affecting trade. Roux has announced he is closing Le Gavroche at lunchtimes. At Wetherspoons, Brexit-supporting boss Martin has urged ministers to use their ability to set immigration laws to grant visas to EU citizens.

In part, the problem has been caused by the sudden surge in consumer demand as restrictions have been eased. Having been cooped up for so long over the winter, consumers have wanted to go out for a drink, a meal, or enjoy a weekend break. Lots of venues have been looking for staff at the same time.

The hospitality sector employs one in 10 workers in the UK – more than three million people in total – but has been particularly hard-hit by the repeated lockdowns of the last 15 months. Some of those employed in pubs, restaurants and hotels are still on furlough and not ready for a new job. Others have decided to change career or to stay on ine education rather than risk the vagaries of the labour market. Workers from the EU have returned to their own countries during lockdown and for a variety of reasons – health concerns and Brexit in particular – are not coming back.

There are solutions to this problem. The more unscrupulous employers might sweat their workforces harder, something made possible by the low level of union membership in the sector. They could decide – as Roux has done – to limit opening hours, although this is more feasible for businesses at the luxury end of the market than it is for high-volume outlets. A third option would be to attract more workers from overseas, which is what Tony Blair did when he welcomed people from the countries of eastern Europe after they joined the EU in 2004.

The only other solution is the most obvious one: make the jobs more attractive through higher pay.

There would be knock-on effects. The price of a pint would go up as employers passed on higher costs to their customers. Inflation would be a bit higher. Some businesses would close. Yet one of the basic tenets of economics is that raising the price of something – in this case the wages of a chef or a waiter – increases its supply.

The impact on labour shortages would almost certainly not be instant, because those attracted to a job in hospitality by the lure of higher wages may not have the necessary skills. But incentives would eventually make a difference in a sector notorious for its long hours and low pay.