Two reasons why the Sainsbury's pay hike is big news for the British economy

Sainsbury's is giving its lowest-paid workers their biggest pay hike in years. 

137,000 staff will be getting a 4% pay hike, and the basic hourly rate for an employee will rise to £7.36 ($11.48).

That's a big piece of news for the British economy, for two reasons.

The first is wage growth. After years of stagnation, British wages are finally starting to rise at a moderate pace again. Since inflation is currently bumping along near zero, real wages are rising at a pretty decent pace.

As the labour market gets tighter (with fewer unemployed people looking for work), businesses will generally be forced to offer higher wages to their employees. They'll be looking to hold on to existing workers and attract the dwindling numbers still looking for jobs. 

We've seen similar things in the United States over the past year or so — wage growth has been weaker than it was before the crisis in the US, but stronger than in the UK. Wal Mart hikes wages for half a million people back in February.McDonalds followed in April.

For the economy, wage growth at the lower end of the income scale is a particular boost to demand because of something called the marginal propensity to consume. In short, if you give a person with a high income and a person with a low income each an extra pound, the low-income earner is more likely to spend it than save it. 

If the hike is about businesses feeling more confident and able to increase pay, especially those with hundreds of thousands of low-paid workers, then it's undoubtedly a good thing.

The second important thing is that with the new national living wage coming into force, Sainsbury's has essentially got ahead of the pack and raised its pay levels ahead of the new mandatory "living wage" — which is effectively just a hike in the minimum wage.

From the end of this month, the basic hourly rate at Sainsbury's will go up to £7.36 ($11.48). That's above the £7.20 that the minimum wage rises to for over-25s. That rate will climb to £9.35 by 2020.

In part, it's a PR stunt by Sainsbury's. Other retailers will have to raise wages by a similar amount soon, but they're unlikely to get any positive press for it if they wait until they have to. 

But there's also something to worry about here. The minimum wage has climbed slowly during the last few years, after pretty rapid increases during the early years after it was introduced. Back in 2002, the minimum wage was worth less than 45% of the median UK wage. It'll be worth more like 60% by 2020. 

It's not a small number of people, either — currently slightly more than fifth of workers earn less than the UK living wage (that's a slightly different measure to the Chancellor's new "national living wage").

Though people are understandably excited about higher pay for people on low wages, productivity in the UK has been absolutely abysmal in recent years, and that's important. Ultimately, earnings are tied to productivity — how much we can produce given the amount of hours we work. If that doesn't rise, pay won't either.

Minimum wages are a complicated topic in economics — a lot of people in the UK argue (rightly) that their introduction didn't cause higher unemployment that some critics expected.

But the UK has just been through an period of productivity weakness that doesn't have a modern precedent in this country. It's a brave move to hike the minimum wage in those circumstances — and it might turn out to be a stupid one. 

Some businesses (apparently like Sainsbury's) will be able to manage and even get a little bit of positive publicity out of the new national living wage. But others might seriously struggle.