Britain’s Labor Shortage Is Helping Drive Its Inflation Problem

For two and a half years, the upstairs room at Luc’s Brasserie, a French restaurant in the City of London, has sat idle, closed off through the ups and downs of the pandemic. Next month, it will finally reopen with freshly painted walls, new décor and a calendar filling up with reservations.

But something crucial is missing: the staff.

Darrin Jacobs, the owner of Luc’s, needs to hire three more people to serve the diners, and he’s been looking for months. Four or five times a day he checks jobs websites, trying to get to the best candidates quickly. But he’s struggling to compete in Britain’s red-hot labor market.

When faced with an unexpected opening or sudden busyness, “you used to be able to react overnight and just go out there and hire someone, it was instant,” Mr. Jacobs said. “We’ve been looking since June to get staff for September and we still haven’t got it.”

This inability to find people to hire has spread across the economy, in virtually all industries, and the solution chosen by many employers — higher pay — is embedding inflationary pressures deeper into an economy where prices are soaring. Last week Britons learned the annual rate of inflation reached 10.1 percent in July, the fastest pace since 1982, as energy prices rose and businesses passed higher costs — for supplies but also labor — onto their customers.

In some ways it’s a great time to be a worker in the hospitality business. Wages have jumped higher and experienced staff can afford to be extremely picky about where they work. But Mr. Jacobs, who pays his wait staff minimum wage (9.50 pounds, or $11.35, an hour for people over 23) plus a 13 percent service charge, amounting to about £14.75 an hour, said he won’t meet some of the top salary demands. His profit margins have been eaten up by higher costs for food and energy.

The pandemic and Brexit have changed the British labor market, sapping an essential source of workers. How long these recruitment pains last will be greatly determined by how permanent these changes prove to be.

The labor force has shrunk thanks to a combination of workers driven away by Britain’s decision to leave the European Union, a pandemic-related increase in sickness, and people re-evaluating their life choices, including early retirement. One particular source of concern is there are now half a million more people in Britain who aren’t working or looking for work, called “economically inactive,” including a large increase in the number of people who are counted as “long-term sick.”

At the same time, the number of job vacancies has exploded to nearly 1.3 million, a record high.

“It’s certainly new for the U.K. to have this level of lack of availability of staff,” said Alastair Woods, head of pay and reward at PwC, who advises clients on salary matters. To the heightened competition, “money has been the answer so far,” he said.

Average wages across the country grew by 4.7 percent in the second quarter compared with the previous year, more than twice as fast as they did in the decade before the pandemic, according to data published last week by the national statistics agency. It’s even faster once bonuses are included. Some industries have been experiencing particularly quick wage growth. Retail, restaurant and hotel workers saw their wages rise nearly 8 percent in the second quarter compared to the previous year. But there has also been above-average wage growth in traditionally highly-paid jobs: Average earnings jumped more than 6 percent in the finance and business sector. Just a few months earlier, wage growth in the sector topped 10 percent.

Companies are not only trying to fill vacancies, but retain workers whose skills may be hard to replace in a tight labor market. In late June, PwC said it was plowing 120 million pounds ($142 million) into pay raises, with half of its employees in Britain getting at least a 9 percent pay raise. Graduates going into consulting roles will be offered £33,500 per year in London, an 8 percent increase.

But this fattening of some paychecks is doing little to assuage a growing economic dread in Britain. For the majority of workers, earnings aren’t rising fast enough to keep up with inflation, which follows years of lackluster wage growth. The rapidly rising cost of living has triggered a series of strikes this summer, from criminal defense lawyers and train operators to postal workers and dock workers, demanding pay raises more closely aligned to inflation.

For policymakers at the Bank of England, though, the overall growth in wages is a sign of trouble. They cited the tight labor market as one of the key reasons for increasingly aggressive interest rate increases, which have the ultimate goal of making money more expensive to reduce spending and slow down the economy.

The scramble for workers has led to some unprecedented wage offers, especially for lawyers, according to Chris Poole, the U.K. managing director at Robert Walters, a recruitment consultancy. A new benchmark was set for recently qualified lawyers at about £179,000, the consultancy said. British law firms are competing for workers in a global market, up against American law firms offering attractive dollar-based salaries, taking advantage of the currency’s strength, Mr. Poole said.

“Inflation is clearly into wages now,” Mr. Poole said. People are being offered 25 percent or 30 percent increases on their previous base salaries when they move jobs, when the norm used to be closer to 10 percent, he said.

This desire to hire has hardly slowed down even as Britain heads toward what the central bank is forecasting to be a long recession starting later this year. Companies are reluctant to shed staff because they don’t want to repeat their experiences after pandemic lockdowns, when it proved difficult to replace the workers they had let go once demand returned. “That’s something that most firms are dreading,” Mr. Poole said.

For companies, hiring while alarm bells are ringing about a looming drop in consumer spending and economic activity has created a “complicated scenario,” said Kate Shoesmith, the deputy director of the Recruitment and Employment Confederation.

Despite the outlook for a dimming economy, employers still say they need to hire more, Ms. Shoesmith said. They contend “the only way we can grow is by hiring people,” she said. “That’s what’s holding them back.”

It’s a calculation Mr. Jacobs weighs as he keeps trying to hire workers at Luc’s Brasserie. “I have to get them now and hope that we’ll be busy enough to keep everyone in their job,” he said.

But there is no quick and easy way to increase the labor supply. The government says there are more than a quarter of a million people not working or looking for work because they are “long-term sick.” Some cases are likely to be long Covid and others from delayed treatment, an issue of increasing distress in Britain. There are about 6.6 million people waiting for care from the National Health Service, a backlog that will take years to clear.

And since Britain voted to leave the European Union in 2016, population growth has slowed. While official statistics on migration have been incomplete since the pandemic began, data shows that growth in the E.U.-born population in Britain has stalled since 2017 and then fallen. More than four in 10 companies recently surveyed by the central bank said a lack of available workers from the European Union was a reason for their recruitment challenges.

Sixty percent of Chris Greenwood’s staff used to be from E.U. countries. Now, at his three coffee shops and cafes in south London, that’s dropped to about 20 percent and many of the employees are 19- or 20-year-old British students whom he doesn’t expect to work for him for very long.

Mr. Greenwood is always looking for more workers.And he’s raising wages too. He pays everyone £9.50 an hour for the first month, regardless of age, and said he has to raise pay “fairly quickly” to keep staff after that month of training, pushing the minimum up to at least £10.50. At one cafe, Louie Louie, Mr. Greenwood is looking for a weekend brunch chef at £15 an hour, for five-hour shifts. Before the pandemic, the brunch was a popular weekend offering, but he’s been forced to offer it on Saturdays only because of a lack of cooks.

Mr. Greenwood, though, still has his eye on further expansion to more locations and more diversification in an effort to reduce the risk of the business succumbing to cost and rent pressures. Early next year, he’s thinking of turning the kitchen at Louie Louie into a bakery, eliminating the need to buy over 100 pounds of bread a day, to save money and ensure consistent supplies.

“Problem is we can’t find a baker,” Mr. Greenwood said.