A Pay Cut by Another Name

The number on your payslip [your nominal wage] went up. What that number buys [your real wage] mostly didn’t, and in plenty of years it fell.¹ And there’s a second part to this almost nobody accounts for. Technology should have been cutting your cost of living every year you’ve been working. So the honest comparison is your rise against the falling prices you were supposed to get and never did.

Two forces are fighting over your payslip

Every year our tools improve, so the same goods and services take fewer people, less energy, and less time to produce [productivity]. That holds for everything technology has changed the making of. It doesn’t hold for housing, care, teaching, or building. Competition pushes prices down toward what things cost to make. You can watch this force operate wherever money’s influence is weakest. The phone in your pocket swallowed a camera, film, a map, a music collection, and long-distance calls, and the price of all that capability keeps collapsing.² In a market with honest money [money nobody can create more of], nothing cancels that force, and pay that merely stays flat buys a little more life each year. That’s a real pay rise that never needed a meeting with your boss.

Now the counterforce. Our money is created through lending, and most debt is fixed in pound terms.³ If prices broadly fall and nothing is done to stop it, the income that pays those debts falls too. Company revenues and tax receipts drop almost at once. Pay follows slowly, which is why falling prices would leave you better off for a while. The debts don’t move at all. A mortgage, your employer’s loan, and the government’s borrowing are the same number of pounds whatever prices do. Whether the system can carry that depends on how prices fall.

A system loaded with debt can take a slow fall that comes with better tools. In that fall it’s the cost of making things that drops, and pay drifts down slowly behind it, so the money to meet a fixed payment is still there. What it can’t take is a sudden fall in the prices credit pushed up, houses first, because then the losses spread through the banks. In that fall it’s the lending that has stopped, so incomes and the house fall together and at once, and the fixed payment is hit from both sides in the same year. Houses come first because people buy them with borrowed money. The debt takes a bigger bite of every income. And where the loan was written against a house, the house is worth less too, so the bank stands to lose more on that loan. So every time a sudden fall in those prices threatens, the system is rescued with new money, and the rescues keep getting bigger.

In between, the government and central bank create new money and credit to keep prices rising by 2% a year, and that rate is an explicit target.⁴ Central banks publish why they aim there. They want room to cut interest rates in a downturn, they know wages resist falling, and they say the official measure of prices overstates the rise.⁵ Those are the reasons they give, and the debts aren’t among them. The debts show up in the rescues, not in the everyday 2%.

Why you’re always at the back of the queue

New money, whether for the rescues or for the everyday 2%, doesn’t reach everyone at once. It usually enters through bank loans and the central bank buying bonds, so it lifts house prices and shares first, pulls rents up close behind, and reaches wages last.⁶ That order has a name, the Cantillon effect.⁷ Whoever gets new money early spends it at old prices, and by the time it filters to you, prices have already moved. Wages move more slowly than the prices they have to cover, because pay is renegotiated maybe once a year.⁸ So your rise arrives after last year’s price rises and often falls short of them, while next year’s are already coming.⁹ You keep running to stand still. The rise that felt like progress was catching up, not getting ahead.

You can watch the counterforce at full speed too. When Malawi’s currency was devalued by about 44% overnight, prices jumped across the board, and no one got a 44% pay rise to match.¹⁰ Your version runs at about 2% a year instead of 44% in one day, slow enough to pass as normal.

Why it feels worse than the official number

The inflation figure is an average over a basket of the things people buy. Cheap electronics pull the average down.¹¹ The costs that dominate your actual life, housing above all, run hotter. Supply is tight, and where building is limited the rises run further.¹² But what sets them off is borrowing getting cheaper and easier.¹³ Money that can’t hold its value turns houses into savings accounts and the credit flows straight into them. Add the price rises hidden at the till. A price can rise while the sticker holds still, and a smaller portion, thinner quality, and slower service are three forms it takes. So a rise that “beats inflation” on paper can still lose to your lived costs. That’s the gap between the statistics saying you’re fine and the feeling at the till that you’re not.

The part nobody counts

Even if your rise exactly matched your lived costs, you’d still have been short-changed, because the starting point is wrong. Don’t measure inflation from zero. Measure it from where prices would have gone without interference. Say better tools would have cut prices by a point or two in a year, which is about how fast output per hour of work grows on the published figures.¹⁴ Instead, prices rose 2%. On those numbers, three or four points of what your pay could buy moved somewhere else that year, without a line item anywhere. You worked just as hard. Technology made things cheaper to produce. The saving never reached you as lower prices. Part of it reached you as higher pay, late and unevenly.¹⁵ The rest was absorbed by the expansion of the money supply, and it surfaced in the prices of assets owned by the people ahead of you in the queue. That’s why the share of the house your landlord owns outright grew while your deposit target ran away from you. And why you’re pushed to become an investor, taking risks you never wanted, just to stand still.

Reasons to think your rise was real

“Wages do catch up over time.”

They chase, they don’t catch. The lag is the point, and the shortfall compounds. A shortfall of a few percent a year, held for twenty years, can be the difference between owning a home and renting one from someone who got the new money first.

“Official real wages look fine.”

The basket leaves out the price of the thing you’re actually saving for, a home, while the things technology already cheapened pull the average down.¹⁶ Your life isn’t the basket.

“We need 2% inflation or people stop spending.”

You still bought a phone knowing next year’s would be better and cheaper. People buy what’s useful when they need it. What does get put off is the purchase that can wait, and sometimes that’s a big one, like a car. What falls when people wait is the borrowing that would have paid for it, and life carries on. Falling prices from productivity are progress. The dangerous deflation is a debt collapse, and what makes it dangerous is the debt, not the cheaper goods.¹⁷

Why your rise never felt like one

For a given payslip, inflation is wage deflation, because the same number of pounds buys less. They’re the same event seen from two sides, and your pay rise is how the system passes its own price rises back through your payslip about a year late and calls it a reward. Across a year it’s a real pay cut only where your rise is smaller than the price rises, and the wait between one pay review and the next makes that the case for a stretch of most years.

Once you see that a bigger number isn’t a rise, the next question asks itself. What would pay look like measured in a unit nobody can create more of? That question is the door. Flat pay in a money that can’t be diluted is a rising life, because the falling prices finally get through to you.