This might sound straightforward. The depreciation instantly after Brexit, plus subsequent declines within the variety of Euros you should purchase with a £, are pushing up import costs which feed into shopper costs (with a lag) which scale back real wages. But real wages rely upon nominal wages in addition to costs. So why are nominal wages staying unchanged in response to this improve in costs?
While this helps account for the shortage of enchancment in internet commerce, it will increase the puzzle over why nominal wages aren’t responding to larger import costs. If exporting companies income are rising due to the depreciation, why not cross a few of that on to their staff?
One completely good reply is that the labour market is weak, and what has stopped real wages falling additional is that companies don’t like to reduce nominal wages. In these circumstances there can be no cause for exporters to share their larger income with their workforce. So the fast influence of the depreciation has not been a decline within the phrases of commerce (export costs/import costs), however as an alternative a shift within the distribution between wages and income. But many individuals consider that, with unemployment falling quickly, the labour market is just not weak.
The first is specialisation. Because nations have a tendency to specialize in what they produce, they could not have companies that produce options to many imports, making substitution harder. The EU produces many extra varieties of products than the UK, so they’re extra doubtless to have the ability to substitute their very own items to substitute UK exports. The second is the significance for UK exports of providers, and the important thing position that the Single Market has in enabling that. On each counts, to offset exports falling by greater than imports after Brexit we’d like a real depreciation in sterling. Exporters could have to minimize their costs in abroad foreign money phrases, and a depreciation permits them to do that.
Of course Brexit has not occurred but. We nonetheless get a depreciation as a result of in any other case holders of sterling foreign money would make a loss. So companies don’t want to reduce their costs in abroad foreign money but, permitting them to make greater income. But these greater income shall be momentary, disappearing as soon as Brexit occurs. It would subsequently be silly to increase wages now solely to have to reduce them later when Brexit occurs (nobody likes nominal wage cuts). To restate this in additional technical language, when Brexit does occur the UK’s phrases of commerce will deteriorate as a response to export volumes falling by greater than import volumes. Firms are in a way anticipating that decline within the phrases of commerce by not permitting nominal wages to rise to compensate for greater import costs.
SOURCE: primarily macro – Read whole story here.