Union leaders have mocked calls from government ministers for wage moderation, believing its members should close the gap with rising inflation or risk a severe cut in living standards.
One of the main reasons mentioned by Bank of England and Treasury officials for wage moderation is the threat of a wage / price spiral and the fear that this ratchet effect will turn double-digit inflation into a feature of long date of life in the UK.
There are 32.7 million people employed in the UK, and if they all receive wage increases that match the current inflation rate of 9%, it will be a crippling bill for employers, including local and central government. Figures released on Wednesday could show that the consumer price index (CPI) is close to the BoE’s forecast of 11% in October.
The wage / price spiral is an academic concept based on a theory of inflation expectations. A series of articles by economists in the 1960s and 1970s, when inflation was thought to be a constant threat, argued that once households expect inflation to be high in the foreseeable future, they will demand higher wages. Companies will be forced to pass on the cost of higher wages, which will create a second round of price hikes.
With higher wages chasing higher prices, the concern is that the country will soon find itself, if not with 1,000% hyperinflation, with a level of wages that makes most British exports unattainable in foreign markets.
However, the concept of inflationary expectations is based on a theory rather than empirical evidence. And it comes from a time when workers, a large number of them working in state-owned industries, had far more power than they currently enjoy.
In 1975, when inflation reached 25%, the wages of manual workers increased at an annual rate of 31.7%, while the average income of all employees increased by about 28% per year. Following the 1974 oil shock, rising prices were felt more sharply in the British open economy than elsewhere. Inflation in France in 1975 was 12.7% and 6.7% in Germany.
But earnings were already behind inflation in 1976 and continued to be so for the rest of the decade.
Currently, the negotiated salary increases are around 4%, more than 3% at the beginning of the year. The National Statistics Office says average wage growth without bonuses is 4.2% in April, less than half the 9% inflation rate. Only bonuses allow workers to be close to overcoming the inflation gap and are unequally distributed, and most are offered to City Council staff, IT professionals, lawyers, accountants and employees. construction.
Tony Wilson, head of the Institute for Employment Studies, said: “So far there are few indications of a wage / price spiral, but some indications that private sector services are raising wages in response to a tighter labor market. “
The response to labor shortages should not be higher interest rates, he added, but a greater effort by ministers to encourage those who have left work to return to the workforce.
Another difference with the 1970s is the level of financial support provided by the government. According to the Institute of Fiscal Studies, pensioners and low-income workers with families have been largely protected from rising prices by Rishi Sunak’s recent bailout package.
It means they don’t have to ask for a wage increase that equals inflation to maintain their standard of living. This is likely to be an enigma for unions currently debating whether to follow the railroad strike.
If the £ 650 increase in universal credit this year and other measures totaling more than £ 1,000 for many households allow them to meet higher energy and food bills, what is the financial and emotional boost? behind the demands for a double-digit salary increase? ?