The supply side of the UK economy has been compromised during the Covid-19 pandemic. It has been a large shock, and relative prices need to change for the market mechanism to redirect resources to where they are most productive. Since it is easier to raise prices than lower them, prices overall will rise and inflation will result. Although I believe that supply constraints were the primary reason for high inflation in 2021, it was pleasing to see that supply was more resilient than I feared it might be when the pandemic began.

It is difficult to see a compelling causal mechanism running from higher aggregate wages to higher productivity in the UK, when the converse is so obviously attractive. There are clever models in which low wages discourage effort (e.g. the effort of workers in their jobs or the efforts of employers to automate or invest in their workforce) but at the aggregate level these feel like exercises in “rationalising apparently puzzling behaviour” that economists are attracted to. Remember the largely now debunked “expansionary fiscal contractions”? Raising wages to improve productivity looks like falling into the fallacy of reverse causality. History is unlikely to look kindly on such initiatives.