The "Wage-Price Cycle"​

By Jake Rickman​

What do you need to know this week?

Investors are betting that the European Central Bank will follow the lead of the Federal Reserve and increase interest rates. As we have examined in past newsletters, this could indicate that the market is coming around to the idea that inflation is not “transitory” but “sustained”. In other words, it might be here to stay for more than a couple of months.

This might, in part, explain why market reporters are paying increasing attention to the so-called “wage-price cycle” as a dominant cause of inflation. This refers to a chicken-and-egg scenario where the increased cost of certain items, like food and energy, gives workers increased leverage to bargain for better wages. This increases the “input cost” employers have to stomach, so they in turn raise the prices they charge their customers to try and maintain the same profit margin. This drives prices up. Rinse, lather, repeat.

Why is this important for your interviews?

Compared to other potential drivers of inflation, if labour costs are up around the board, anyone that acts as an employer will be impacted.

While there is some debate as to how universal this theory is, one thing is for sure: the pandemic has made the labour market more irregular than ever. Across many sectors, businesses are struggling to recruit workers. From a managerial perspective, this can hamper productivity because fewer employees are available to help a business make a profit. It also drives up the “unit cost” of labour because businesses have to pay more per hour (or per year) to recruit and retain workers.

This is particularly true in industries that struggle to adapt to remote working, such as travel, tourism, and the food & beverage sectors.

This labour crisis is something to keep in mind when presented with a commercial case study because it can help you apply general principles of business analysis to a set of facts. If a business employs others, odds are they will have to evaluate the cost of labour, to what extent they can afford to pay more, and if they can pass this cost on to their customers. These are considerations businesses contend with in real life, which means if you can articulate them, you will demonstrate you understand the current key drivers behind client costs.

How is this topic relevant to law firms?

This is more of a macroeconomic factor that law firms must consider when addressing any legal or commercial issue a client presents with than something that directly impacts a particular practice area.

That said, it’s always good to remind yourself that law firms are businesses too. Their biggest expense? Paying lawyers!

The UK legal profession is also embroiled in a “talent war”, as top City firms outbid one another to attract aspiring lawyers.