ARTICLE
2 February 2023

Cost Of Living – Impact On The World Of Work

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Ius Laboris

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Ius Laboris is consistently recognised as the leading legal service provider in employment, immigration and pensions law. Our firms help international employers navigate the world of work successfully.
In the preceding months, unforeseen demand from a world emerging from Covid had already pushed up prices and compounded supply chain issues for many products.
Worldwide Energy and Natural Resources
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On 24 February 2022, Russia invaded Ukraine, setting off a chain of global events and triggering a cost of living crisis in many countries.

In the preceding months, unforeseen demand from a world emerging from Covid had already pushed up prices and compounded supply chain issues for many products. However, it was war in Ukraine that shifted higher costs into a crisis. Action taken by The Organisation of the Petroleum Exporting Countries (OPEC) to reduce oil supply will operate to maintain high oil prices. Inflation across Europe and North America has reached levels not seen for 40 years. Concerns are growing that higher energy costs could even lead to shortages and power cuts later in the winter. This cost of living crisis was the second "black swan" (a low probability, high impact event) in two years. Indeed, the 2021 Report suggested that a future black swan "could be economic, such as a surge in inflation". Although it could be seen as a ninth driver of change, the cost of living crisis arises from the coming together of several drivers of change.

  • Globalisation: the dependency on oil and gas imports from Russia has been the key driver behind this crisis. Reliance on Russia and Ukraine for many other commodities has resulted in price rises and shortages. Globalisation depends on goods being transported around the world – the dramatic rise in oil prices adds to the costs of international trade.
  • Covid: rising global demand from economies seeking to meet pent-up demand from the pandemic had already resulted in rising prices even before Russian troops crossed into Ukraine.
  • Sustainability: extreme climate events over the last twelve months led to crop failures, shortages and increased prices.
  • Role of the state: some countries are managing to weather the crisis better than others through political action (e.g. state support to cap energy prices) or on account of past political decisions (e.g. French reliance on nuclear fuel and state control over Électricité de France (EDF) contributed to lower rates of inflation). In the UK, political decisions such as those relating to the UK's trading relationship with the EU post-Brexit and experimenting with unfunded tax cuts have added to costs for consumers and businesses.
  • Migration: In the UK, Brexit and barriers to work migration have contributed to skills shortages and rising labour costs.

In the UK, pay awards have lagged behind rising inflation, contributing to record cuts in real pay. As the Office for Budget Responsibility pointed out in its November 2022 Economic and fiscal outlook: "Rising prices [will] erode real wages and reduce living standards by 7 per cent in total over the two financial years to 2023-24 (wiping out the previous eight years' growth), despite over £100 billion of additional government support". This is the biggest fall since records began. Many people are responding to the cost of living crisis by taking steps to earn more. In the UK, 19% are looking for promotion or a better paying job to earn more and 15% are looking to work longer hours. Others are looking to spend more time at work to reduce domestic energy bills and taking on second jobs.

Despite pay awards generally falling well behind cost of living rises, some employers are awarding more generous pay rises driven both by the need to attract and retain people and by concerns about the impact of the cost of living crisis on their people. Many employers see this as forming part of the social aspect of their Environmental, Social and Governance (ESG) commitments and a wide range of responses are emerging, including making one-off payments.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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