Well, we are sorry. The economic debate moved into a new phase yesterday. Maybe we are now set to go through the most critical period yet in the story of this extraordinary economic crisis. And it has come down to that old-fashioned issue: pay restraint. Real income is falling, will we see a wage price spiral? Following a period of massive inflation in executive pay, trade unions are reasonably asking why their members can not receive pay rises in line with inflation. It is a mess.
Here is the story in 10 stages.
Stage 1 – On April 25, in this column, we said that painful as it is, we will just have to accept that higher commodity prices mean we are worse off. Providing we do that, take it on the chin, the rate of interest will stay down, and unemployment should not be affected too badly. But, if we try and somehow avoid paying the cost of rising commodity prices, through demanding and then getting inflation-busting pay rises, interest rates will go up, unemployment will rise.
Stage 2 – On May 9 we told how, according to KPMG and Recruitment and Employment Confederation (REC), April saw the lowest rate of pay inflation during the last 57 months.
Stage 3 – On June 12 we told that average earnings, including bonuses, rose by 3.8 per cent in the year to April 2008, down from 4.0 per cent in March. At that time, the retail price index was rising at 4.2 per cent. Theoretically, providing wage inflation minus improvement in productivity is no greater than the government’s inflation target, then there is no need for a rise in interest rates. Economic productivity was up 1.7 per cent in the year.
We also said: “Unions do not the have the muscle they once did. A repeat of the winter of discontent seems unlikely. There has been plenty of anecdotal evidence to suggest some workers at least are accepting pay cuts.”
Stage 4 – Earlier this week, Shell’s tanker drivers were awarded a 14 per cent pay rise over two years.
Stage 5 – Yesterday (June 18), the BBC headlined a story suggesting our gas and electricity bills will rise 40 per cent by Christmas.
Stage 6 – In his letter to the chancellor, made publicly available on June 17, the Bank of England governor talked about wage inflation. “This has been moderate up to now,” he said, but added, “The prospective squeeze on real incomes associated with higher inflation, together with the reduced availability of credit, is likely to lead to a further slowing in activity this year. This will reduce pressure on the supply of capacity of the economy and dampen increases in prices and wages.”
Stage 7 – Yesterday, Brendan Barber, General Secretary of the TUC said: “Our economic difficulties are caused by reckless lending by bankers and inflation comes from higher oil, food and commodity prices … Inflation and the pressure on wages will drop as the economy slows. That does not suggest we are heading for a runaway wage-price spiral.”
Dave Prentis, general secretary of Unison said: “Public sector workers have had below-inflation pay deals year-on-year. We are balloting 800,000 local government members for strike action over a 2.45 per cent pay offer and, if inflation continues to spiral, we will trigger the re-opener clause in the NHS deal and go back for more money.”
Dai Hudd, assistant general secretary of Prospect said: “If the fuel tanker drivers’ settlement represents pay restraint in the private sector, can the public sector have a little of that restraint as well?”
Stage 8 – At Prime Minister’s Question time yesterday, Tory MP Sir Michael Spicer asked: “Why are there so many strikes at the end of a Labour government?”
Stage 9 – In his Mansion House speech, yesterday, Mervyn King said: “This year our real take-home pay will rise at a slower pace than national productivity. Rising fuel, gas, electricity and food prices, mean that average real take-home pay will stagnate this year. It will not be an easy time, and I know that some families will find it particularly difficult. But it is only a temporary slowing in the growth of our real take-home pay, and remember that this is the opposite side of the coin to the falls in prices of manufactured goods from countries such as China and India, which in the nice decade allowed our standard of living to rise at a rate faster than productivity.”
Ominously he also said: “There should be no doubt that the MPC is prepared to take whatever action is needed to return inflation to the 2 per cent target and to keep expectations of inflation in the medium term anchored to the target.”
Stage 10 – Yesterday, the minutes of the latest MPC meeting were revealed, and it emerged they considered upping interest rates.
We have been through a period of almost-obscene rises in pay for people in senior positions. Incredulously, now MPs want an inflation-busting pay rise. This has already created resentment. Now we are being told we have got to accept that over the next year or two we are going to be worse off. You can’t blame unions wanting to press for higher wages.
Margaret Thatcher famously described unions as “the enemy within”. On this occasion, it is tempting to conclude the enemy sits higher up the hierarchy.
But, if unions are successful, and wages do rise, the Bank of England will have no choice but to up interest rates, and maybe by quite a bit. Unemployment will rise, until wage increases stop. Such a scenario will make a recession inevitable.
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