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British high streets further threatened by low wages

High street

British high streets are suffering their worst opening rates for years but as the average UK wage grows beneath inflation, retailers will be hard pushed to meet overheads while attracting a squeezed consumer base

Over the years, I have found that one of the best ways of staying investment relevant is to copy down a few headlines from news sources on a daily basis. No explanations or details, just the headlines, and then review them from time to time:

‘Jamie Oliver is to close 12 restaurants putting more than 200 jobs at risk under restructuring plan’
The Daily Mail

‘Toys R Us faces bankruptcy, putting 3,200 jobs at risk’
The Guardian

‘2,500 jobs at risk as electronics store Maplin falls into administration’
Leicester Mercury

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These were some of the more concerning headlines over the last month. Of course, we all ‘know’ that the high street is struggling, as it’s under fire from online competition, but the general belief is that the UK economy, like most Western economies, is strong. After all, we are back to the lows of the unemployment cycle, on both sides of the Atlantic.

UK Unemployment

UK Unemployment, Source: Bloomberg/Hinde Capital

US unemployment. Source: Bloomberg/Hinde Capital

US unemployment. Source: Bloomberg/Hinde Capital

People usually spend money in shops and restaurants when the economy is close to full employment, but that doesn’t seem to be the case this time. Retail sales, as shown below, are not having a pretty time of it at all, suggesting that the economy is nowhere near as strong as economists would have us believe.

UK retail sales

UK retail sales. Source: Hinde Capital / Bloomberg

With UK interest rates still extremely low, mortgage repayments should not be too restrictive on disposable income, but inflation is clearly on the upswing and the wages’ story is misleading.

UK Inflation (RPI).

UK Inflation (RPI). Source: Hinde Capital/Bloomberg

Since the National Minimum Wage Act of 1998 – a flagship policy of the UK Labour party – all workers have benefited from a rising minimum wage. Since 2016, there has been an amendment for workers over the age of 25, the ‘National Living Wage’. This is set at a higher rate than the NMW, which is expected to rise to at least £9 per hour by 2020, with London workers at even higher levels.

NMW explainer

Source: The Living Wage Foundation

UK Minimum hourly wage

UK Minimum hourly wage.

NMW/INFLATION/WAGES

Source: Hinde Capital / Bloomberg

In my opinion, the chart above shows the crux of the problem. Minimum wages (and now National Living Wages as well) have risen over 30% in the last decade, beating inflation by a small margin. But the average of all wages has trailed miserably despite record employment. Economically speaking, this is a strange phenomenon. Workers are being sought and hired in record numbers, yet they are unable to command higher salaries. While there may have been pay freezes in the government sector, the private workforce has had no such constraints.

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Variant Perception, in my opinion one of the best macro research firms in the world, recently published a report that showed the same situation was occurring in the US, where despite record profit margins, the labour force was receiving very little of the spoils. I would urge people to try and get a copy of ‘Oligopoly USA’: the report’s conclusion was that competition is being effectively crowded out by ‘new’ oligopolies because of the declining number of US companies, due to acquisitions and the increased concentration of industries. The effect is that workers have less employment alternatives and companies have more ability to control pricing power and maintain these profit margins. With CEO pay at 271 times that of worker pay, it’s pretty clear all is not well at the employee level.

CEO to worker pay

CEO to worker pay

We are doing further analysis into this situation on this side of the Atlantic, and while we believe there are similarities, the UK appears to be in a far worse position, especially in the retail sector, which is being squeezed on multiple fronts. One of their largest costs will come from minimum wage labour, which is clearly rising, while input material costs and business rates are also rising with inflation. On the either side of the coin, the lack of general wage growth and potentially higher interest is drastically weakening customers’ disposable income and purchasing power. Sadly, it looks like we should expect more retail collapses in the future, possibly spreading to other sectors.

Mark Mahaffey is the CFO of Hinde Capital. This article is based on a piece originally published in Hindesight Letters

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