What crisis? Boris Johnson’s team says supply crunch is good for wages.

A shortage of staff in haulage, agriculture and meat processing is causing significant disruption, with soldiers now intervening to ensure gasoline stations have supplies.

Faced with a supply-chain squeeze that's increased prices across the economy, the UK government is seeking to recast the crisis as a good news story for British workers.

A shortage of staff in haulage, agriculture and meat processing is causing significant disruption, with soldiers now intervening to ensure gasoline stations have supplies. It's forcing firms to offer higher wages, threatening to drive up costs further for consumers contending with increases in tax and energy bills. Inflation is already on course to exceed \(4\%\) this year.

At the governing Conservative Party's conference in Manchester, though, the narrative was rather different.

Asked about the issue in a series of interviews, senior Tories, including Prime Minister Boris Johnson and Chancellor of the Exchequer Rishi Sunak, sought to repaint the rising costs as a part of a broader, positive development.

"I don't think anyone plans to have supply chain challenges, the likes of which we're seeing," Sunak said on Times Radio on Monday. "But I mean more broadly, do all of us want to see a higher skill, higher wage economy? Of course we do. That's a good thing for the UK"

Higher-paid jobs are part of the UK's post-Brexit transition away from a low-wage economy, they said. Sunak said the shortages could force companies to boost investments and increase productivity.

The trouble is that steep wage increases without any corresponding increase in productivity is far from positive, economists say. The situation could lead to a jump in unit labor costs that will likely worry Bank of England officials. With wage increases also confined to specific industries, there's also a risk that real incomes drop because of the effect of inflation.

A supply crisis in the UK, rose on account of a shortage of laborers in haulage, agriculture, and meat processing, leading to cost-push inflation. Inflation refers to the constant increase in price levels for consumers. Cost-push inflation occurs due to scarcity of supply, also known as, supply shocks or increase in production costs. In this case, partly due to a significant decrease in the supply of labor, firms have had to raise the wages of the remaining labor, increasing the costs of production. This led to higher inflation (progressing to exceed 4% in 2021), posing threats to the health of the UK's economy.

Scarcity refers to the demand being greater than the availability of goods and services, and in the UK, the scarcity in staff lead to firms being forced to increase wages of the staff, which is "threatening to drive up costs further for consumers...", putting the future financial security of the country's citizens at risk. When below shows how the shortage has caused significant disruption.

The diagram above shows the effects of cost-push inflation from the monetarist perspective, which is the only model that accounts for changes in price levels in the short run, which is relevant to the issue discussed. The x-axis represents the price level while the y-axis represents the real GDP, a measure of economic growth. The short-term equilibrium point is shown at point \(a\), when SRAS (short-run aggregate supply) meets PL1 and the LRAS (long-run average supply) curve. The leftward shift, or a decrease in the SRAS curve, from SRAS 1 to SRAS 2, represents that when production costs rise, as a result of the scarcity of labor, firms are forced to produce less. As a result of this shift, price level increases from PL1 to PL2 creating a fall of real GDP, from point \(a\) to \(b\), also representing cost-push inflation. The economy is below its equilibrium, and price levels are higher than they were ideally supposed to be. This has increased the inflation over 4% this year.

The effect explained above, can repeat itself and lead to inflation spiraling out of control, which was the case in the UK. Despite the increase in price levels, the UK's outlook on the situation is rather quite positive. They view high inflation rates as a " a good thing " because it becomes an opportunity to transition from a low wage to a higher wage and skilled economy, benefitting and encouraging companies to " boost investments and increase productivity". This would shift the SRAS curve to the right, from SRAS 2 to SRAS 1, closer to the equilibrium point \(a\), reducing the inflation gap. However, concerned economists express the difficulty in assuming firms will increase productivity when labor is scarce and wages are steeply increasing, which could lead to "a jump in unit labor costs", or the average cost of labor per unit of output. Further consequences of this are likely to be a rise in unemployment and subsequently a decrease in economic growth in the UK.

In order to best resolve this situation, considering that the cost-push inflation has arisen on account of scarcity in labor, tackling this issue creates a knock-on effect, reducing cost-push inflation. A solution to reduce scarcity in labor could involve the application of market-based, supply-side policies carried out by the government. This policy aims to let markets operate more freely, by reducing personal income, business, and corporate taxes as well as other reforms in the market. These policies work more effectively in the long run.

By reducing taxes on personal income, it creates greater disposable income, increasing consumers' purchasing power, encouraging more UK citizens to join the labor force. By reducing taxes on business and corporation profits, creates higher after-tax profits, giving firms more capital to invest in increasing productivity by hiring more laborers, for example. With this, the scarcity in labor would decrease, increasing productivity and eventually decreasing wages (which would decrease costs of production), decreasing price levels, which would decrease the cost of inflation.

Limitations of this policy include the uncertainty of their effects. For example, when reducing personal income taxes, it is not guaranteed that the incentive to work would increase in the short run, as price levels are still relatively high in the UK, not achieving a decrease in scarcity. Similarly, reducing corporate taxes would not necessarily lead to an increase in productivity, which is, according to the article, one of the expectations for the economy in the UK. Market-based policies also reduce a significant amount of government revenue, reducing their spending budget for other purposes in the economy. However, the government's use of market-based supply-side policies still has the potential to decrease the scarcity of labor in the long run, but it depends on how much it can change behaviors of domestic consumers and producers.