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FOr a repeat of the 1970s, with all the warnings against industrial unrest, rising inflation and national decline, this is the period in recent British history that Rishi Sunak wants the country to think about most.
Born in 1980, a year after the winter of discontent contributed to the fall of James Callaghan’s Labor government, like millions of others, Sunac has no memory of this tumultuous decade. Yet the Prime Minister hopes to rekindle the idea of greedy union barons bringing the country to its knees.
This week will prove to be a serious test. Britain is heading into its worst period of strike action in recent years, with massive action on the railways, in the NHS, among nurses and ambulance staff and by postal workers. More than 1m working days are expected to be lost, the most in any single month since 1989.
For Sunak, comparisons with the 1970s can help draw a dividing line between the sane majority and the militant few: those who wish to turn the clock back half a century risk the first Christmas since the Covid pandemic without restrictions or high case numbers.
Number 10 warns that sticking to union wage demands carries an unaffordable price tag and could “embed” higher rates of inflation. The Prime Minister’s official spokesman has warned that to defeat the “shared enemy” of inflation, workers must bear the brunt of real-term pay cuts. “If we take all the demands and meet them completely, we will be working against everyone’s interests.”
However, there is a major problem with this argument, not least because it comes in the midst of a public sector crisis. As most people know, a decade of austerity has stripped the state to the bone, that failing services and record NHS waiting lists predate industrial action. Much talk of belt-tightening sounds as crazy to most people as it should rightly so.
It relies on a repetition of the 1970s-style “wage-price spiral,” which a growing number of economists doubt will fully capture. The term describes how settling higher wages encourages firms to raise prices, in a self-fulfilling inflationary game of leapfrog.
It’s clear that Sunac sees public sector pay as a powerful signaling tool for the wider economy, with the view that crushing wage expectations for some 6 million workers here could help deflate the wage-price spiral. However, this is a far cry from where Britain is.
Few workers are getting pay deals anywhere near inflation. Average annual wage growth across the economy is currently close to 6%, a relatively high number in recent history, but significantly below the 11% inflation rate. This means that wages are falling in real terms. The drop is the deepest since records began 20 years ago, according to the Office for National Statistics.
In the public sector, pay growth is still significantly weaker, growing closer to 2% versus 6% in the private sector – the largest gap on record. If sustained, it could contribute to more people leaving key jobs in nursing, teaching and the police, undermining government promises to expand the workforce.
Swati Dhingra, a member of the Bank of England’s rate-setting monetary policy committee, told the Observer that the fact that real wages are falling alone should dispel any idea that wage prices are rising.
Lacking such a spiral, the Office for Budget Responsibility predicts that inflation will reduce real wages and reduce living standards by 7% in the two years to March 2024, wiping out the previous eight years of growth.
Compare this to the 1970s. Despite skyrocketing inflation, real earnings fell in only one year of the entire decade. This was the main reason unions successfully bargained for higher wages to beat inflation. With union membership having halved since 1979, with anti-union legislation and an increasingly atomized workforce, that is unlikely to happen again.
Rather than greedy workers, rising energy prices are responsible for the shock to inflation, as the fallout from Russia’s war in Ukraine increases household bills and manufacturing and transportation costs. That is most evident in the headline rate of goods inflation, now around 15%. For services, where wages make up a large portion of company costs, inflation is running at less than half that rate of around 6%.
This means that acting to cap salaries will have a limited impact on inflation. The Bank of England is of the view that reducing wage growth to around 2.5% – roughly the historical norm before the 2008 financial crisis – could help reduce the headline rate of inflation by around 1.5 percentage points. In terms of inflation above 10%, that’s a drop in the ocean.
This does not mean that there is no inflationary effect on wages. Unemployment has fallen to its lowest rate since the mid-1970s, mainly after an exodus of older workers and an increase in long-term illness, which has tightened the labor market. Brexit has reduced the availability of migrant labour. Firms struggling to recruit are paying salaries in response. Without increasing productivity, the company’s profit margins are either squeezed or prices are increased.
If these trends continue, the jobs market may become permanently tighter than in the past. The bank fears that if workers and businesses expect inflation to remain high, they will respond accordingly.
However, it is a risk that must be put into context. As well as the fact that wages have so far failed to keep pace with inflation, there are early signs that the heat is starting to come off the job market as Britain moves into a long recession.
Companies report that hiring difficulties are easing. Although still at historically high levels, vacancies have declined in recent months. Widely watched job market data from Markit and the Recruitment and Employment Confederation showed wage growth slowing. Meanwhile, indeed, jobs website figures show that advertised pay rates have fallen to 6.1% in recent months from a peak of 6.4% earlier this year.
Britain does not suffer from a wage-price spiral. It’s time to stop perpetuating that myth.
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