Will wage growth revival feed inflation?

With economic stabilization on the horizon, pressure from employers, particularly from white-collar urban workers, is mounting for wage increases.

Wages are likely to rise in 2025, which will stimulate overall demand, with its effects becoming apparent shortly thereafter. This could trigger a wage-price spiral, potentially bringing slight inflationary pressures alongside modest economic growth.

In recent years, bargaining power has largely rested with employers, leaving employees at a disadvantage. Inflation soared while wages stagnated, eroding real incomes. Higher taxation on salaried and self-employed individuals further reduced disposable incomes, prompting some professionals to leave the country while others adjusted their lifestyles.

Now, the tide is turning. Demand is picking up in certain sectors, and employers are struggling to find or retain the right talent, as a significant portion of the employable workforce has sought better opportunities abroad. Bargaining power is shifting to employees, making wage increases inevitable—especially in the finance and ICT sectors.

“We used to have ten chartered accountants in our firm, but now we’re down to three. Two have moved locally to double the pay, while five have left the country. The situation is similar for engineers,” said the CEO of a major firm in Karachi. He expressed concerns about retaining and hiring middle-management employees. A senior executive at a large bank echoed this sentiment.

The country is facing a talent shortage in at least four key sectors: engineering, medicine, finance, and IT. The lack of mid-management professionals is exacerbating the problem, and this supply shortage is expected to drive wages higher.

Over the past few years, employers have reaped significant profits. They benefited from inventory gains during periods of negative real interest rates but did not pass these gains on to employees.

However, the wealth accumulation by billionaires has had little impact on overall demand, as they tend to siphon money abroad rather than spend it locally. In contrast, when employees earn more, they spend on cars, clothing, durables, and even housing, creating a broader economic impact and boosting employment in informal sectors.

With the anticipated wage increases, economic demand is expected to rise. Lifestyles may gradually return to pre-2022 levels, contributing to wider economic growth. However, this growth is likely to remain moderate, as the government must adhere to the tight fiscal framework imposed by the IMF.

Urban middle-class demand is set to drive this recovery, with profits shifting from business owners to employees. Banks, which have enjoyed strong profits in recent years, may now share some of these gains with mid-level bankers. A similar trend is emerging in the manufacturing sector.

IT companies are securing more business, as evidenced by growing exports, but they are also grappling with a talent shortage, which will push salaries higher.

The vibrancy of the middle class is already evident in Karachi, the country’s economic hub. Real estate activity is picking up, and traffic flow is increasing, as highlighted by heat maps. The State Bank of Pakistan (SBP) noted in its recent monetary policy briefing that rising NO2 emissions in Karachi are linked to lagging large-scale manufacturing (LSM) growth.

There are also signs of increased economic activity in Khyber Pakhtunkhwa (KP), which has the largest diaspora population in the country. Decades of conflict and terrorism drove many to leave, but growing remittances are now boosting spending power in the region.

However, Punjab is lagging. Its economy is heavily reliant on agriculture and suppressed farm incomes are taking a toll. Unfortunately, the provincial government is focused on regaining its urban vote bank while neglecting the agricultural sector. As a result, economic demand in Punjab remains subdued, and a turnaround is unlikely until agriculture recovers. Meanwhile, core inflation—particularly in urban areas—may face an upward pressure.

Another challenge is the government’s commitment to the IMF to maintain a primary surplus of 2% annually. To meet this target, the government will need to impose additional taxes and cut spending, which will limit growth in sectors like construction. Combined with the struggling farm economy, achieving broader economic momentum will be difficult.

The shifting dynamics of wage increases, and demand recovery signal a turning point for Pakistan’s economy. While urban centers like Karachi and sectors such as finance and IT are poised for growth, the broader economic landscape remains constrained by structural challenges, including agricultural stagnation and IMF-mandated fiscal austerity.

The key to sustained growth lies in addressing these imbalances—empowering the middle class, revitalizing agriculture, and fostering an environment where talent is retained and nurtured. Only then can Pakistan unlock its full economic potential and ensure that growth is both inclusive and resilient in the face of global and domestic pressures.

Copyright Business Recorder, 2025