Do higher wages help an economy grow?

Anyone who is interested in the financial world will also like to keep tabs on what makes for a strong economy. A strong economy is something that is important for all countries around the world, as it means they remain financially stable. For those who enjoy learning more about macro-level global finance, looking deeper into what makes for a strong national economy is therefore worthwhile. 

This can also be something that people who trade in stocks, bonds and FX find useful to dig into. By knowing what helps to make a vibrant economy, you can apply this to your trading and seek to invest in assets that operate in a successful economy. The truth is that there are many drivers of economic health – you could look at what causes inflation and the inflation levels in a country, for example. 

One factor that is very telling is rising wage levels in a country. Many people think that higher wages can help an economy grow and this is actually very true. But how is this possible? 

Boosts consumer spending 

When it comes to the latest business headlines, you will often see a lot of noise around consumer spending. This is because the boost to consumer spending is one of the major reasons higher wages can help an economy grow. In short, people earning more money have more spare cash to spend on goods and services. This is not always true on the flipside, where people on lower wages tend to spend everything they earn on bills, rent, mortgages and other essentials.

Higher wages, on the other hand, give the average person greater spending power and more confidence to spend the cash they have, and can lead to a real boost for companies in a country. This can be seen in many sectors, from manufacturing firms that make goods for people to buy to those in entertainment or hospitality. 

Aids greater productivity 

The knock-on effect of greater consumer spending led by higher wages is a boost for production levels. As above, more people buying goods means more are needed to keep up with demand. This in turn see more orders for manufacturing or production businesses and helps them prosper.

It is also worth pointing out the extra productivity that higher wages can deliver on a personal level. People who are paid more tend to work harder because they are being treated well by their employer. Due to this, the business sector can see a real spike in production, which helps to drive economic growth.

Cuts back on welfare spending nationally 

Many countries around the world have some kind of public welfare system that helps those who are in dire financial straits. The US is a great example of this and US public welfare spending in 2022 soared to around $1.662bn. While it is of course a good thing to help people who need financial assistance, higher wages can help reduce the number of people this applies to. 

By paying people more, you are able to give them enough cash to manage on their own, without the need for government assistance. This can in turn slash the amount a country spends on public welfare and increase the amount of cash in the national coffers. It can also give governments more money to spend on schools, healthcare and public services. 

Influx of talent into workforce 

Most countries on a global scale tend to rely on attracting a diverse workforce to drive their economy. Higher wages can play a massive role in this, for a few reasons. Firstly, it makes it more appealing for people to relocate to a particular country for work, rather than heading elsewhere. This helps businesses to recruit the very best talent and can lead to a much stronger national business sector. 

By the same token, it can also encourage the best local talent to remain in the country and not head elsewhere for better pay. This again helps countries to hang on to the best workers and leads to a stronger economy overall. When you also factor in how higher wages can make it easier to recruit people for sectors within an economy that might be short on numbers (such as nursing or the police), the benefits of higher wages are obvious. 

Higher wages can equal economic growth 

This clearly shows that rising wages can drive economic growth for a number of reasons. When you put them all together, it is easy to see how people being paid more can be a positive thing for any country financially. While it is important to stop rising wages eventually leading to high inflation, there is no disputing the positives that bigger paychecks bring.