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The fallout for the U.K. economy from one of the worst labor shortages among rich nations is on full display at a Meridian Leisure Hotel in Reading, where managing director Moez Janmohamed likens it to a nightmare.

He is having to close rooms due to the lack of housekeeping staff and to cap numbers on the dinner service “because we can’t find the chefs.” At the same time, he’s raising wages not just to fill vacancies in his hotel a short drive south of London, but to stop the staff from leaving. Even a 30% increase in the salary of a sous chef to 36,000 pounds ($47,600) “doesn’t guarantee you get them,” he said.

“There is an almost cavalier attitude,” he said. “They make multiple applications, sign several contracts and choose the one they want.”

Janmohamed’s experience is a rare moment where workers have the upper hand over pay, something long in the coming and which in time should help support demand and living standards.

But it carries other risks for the broader economy. A failure to secure staff threatens to limit the speed of the post-lockdown recovery. Paying workers more means the Bank of England may also discover the inflation it needs to quell proves longer lasting.

The pain appears to be more acute in Britain than the U.S. and the euro area, according to Bank of England officials, with the impact of Brexit colliding with the pandemic. Before the emergence of the omicron variant, the OECD warned that a persistent shortage of workers in the U.K. could slow what is forecast to be the fastest growth rate among the Group of Seven major economies.   

The threat of wage inflation, meanwhile, helps explains why the BOE is widely expected to raise interest rates before the U.S. Federal Reserve.

Michael Saunders, a BOE policy maker who voted in the minority to hike rates in November, last week rejected the central bank’s official forecast that wage growth would drop from the underlying rate of 4.5% to around 2% next year. 

“Rather than a slowdown in underlying average earnings, it seems more likely to me that pay deals will pick up in the coming year, because the labor market is tight,” he said on Friday.

Ben Broadbent, a deputy governor with more dovish views, said Monday the country’s tight labor market was putting “continuing upward pressure on pay.”  

For Janmohamed, who is at the sharp end of the labor market squeeze in the hospitality sector, the evidence is clear. “We are taking defensive measures, giving valuable members of staff pay rises to deter them from leaving before they have asked,” he said. 

“It’s not transitory inflation at all. Everything has gone up, from wages to wine to food to energy, and there is only one way out of this: to raise our prices.”

He has put up the price of a three-course meal from 28 pounds to 34 pounds, and “banquets that were 35-40 pounds a head we don’t do for less than 50 pounds.”

The question for central bankers is will higher wages bring people back to work to fill the record 1.3 million vacancies? It is key because about half a million workers have vanished since the start of the pandemic and Britain’s official exit from the European Union, which has dried up the flow of labor from the continent.

All told, the U.K.’s participation gap -- an estimate of the number of people who would have been available to work had the pandemic not happened -- totals about 900,000, according to Tony Wilson, director of the Institute for Employment Studies. 

That is almost 3% of the pre-pandemic workforce and not far off the level of existing vacancies. 

Much rides on whether companies can attract the newly “inactive” back to the workplace. If they return, wage pressures will abate. The BOE has said this dynamic will determine policy and the Treasury is closely following developments too.

Where those workers went remains a puzzle. 

There are about 200,000 fewer EU nationals in the country, official statistics suggest, and 360,000 more people under the age of 65 are inactive -- neither in work nor looking for a job. On top of that, the workforce would have increased by around 300,000 had normal pre-pandemic trends persisted. 

Separate analysis by Wilson, Saunders and Jonathan Haskel, another BOE rate-setter, showed that many of those who left the jobs market may be tricky to lure back, which would reinforce the upward pressure on wages. 

Since February 2020, 60,000 more people below the state pension age have declared themselves “retired,” and around 150,000 more are now “long-term sick.” 

Wilson said the figures were likely to reflect workforce “detachment” from people who may be depressed or despondent. Long Covid may account for another 20,000. Employers may struggle to recruit from among those 230,000 former workers.

There are pockets of hope. The biggest increase in inactivity since the pandemic has been among the young, with the student population exploding by 230,000. Of those, only 28% are employed, down from 35% before the 2008 financial crisis. 

If companies try harder to recruit from the 3 million in university, they might be able to persuade 200,000 more into work, Wilson said. 

There are also several hundred thousand more people than before Covid on the intensive work-search group of universal credit. That puts them at risk of losing some of their welfare benefits unless they make a concerted effort to get a job, which may see them fill vacancies. 

Many of them do not have dependents, official data shows, making it easier to move to where there is work.

Janmohamed is not optimistic. 

“Many of those in our industry are second earners, and have decided over the pandemic they would rather have the time off than a second income,” he said. “They have decided working late hours in the kitchen is not the lifestyle they want.”

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