Jun 26th 2008From The Economist
Wage-earners may not prove as meek as the government wants them to be
AS INFLATION makes an unwelcome return, just how workers respond to it has become overwhelmingly important. Alistair Darling, the chancellor of the exchequer, exhorts wage restraint, and with reason. The last thing he wants—or Britain needs—is a pay-price spiral that would turn a temporary surge in inflation, driven by higher global food and energy costs, into a more persistent and general national affliction. Yet the soaring bill for essentials is bound to make Britons worse off, and workers are not slow to spot it.
Until recently, fear of an inflationary wage-price spiral seemed misplaced. Inflation, measured by the retail-prices index, moved up sharply in the second half of 2006 and has generally remained above 4.0% since then (see chart). Despite this, average-earnings growth has stayed remarkably docile, thanks partly to a flexible labour market and partly to confidence that any upsurge in inflation would peter out.
Until recently, fear of an inflationary wage-price spiral seemed misplaced. Inflation, measured by the retail-prices index, moved up sharply in the second half of 2006 and has generally remained above 4.0% since then (see chart). Despite this, average-earnings growth has stayed remarkably docile, thanks partly to a flexible labour market and partly to confidence that any upsurge in inflation would peter out.
That now looks set to change. A recent strike by tanker-drivers resulted in a bumper two-year 14% pay rise. This has encouraged militant talk from public-sector unions, who feel aggrieved that the government has insisted on very low pay deals (around 2%) this year and threaten to strike. Some point to big bonuses and pay rises for even conspicuously unsuccessful company bosses as one reason why they should refuse stingy deals themselves.
Wage awards have already begun to move up, according to Incomes Data Services (IDS), which monitors them. For most of the past year or so, the median pay settlement was typically 3.5%, but in the three months to April it rose to 3.8%. And total earnings, which include bonuses and overtime, tend to increase faster than basic pay. Ken Mulkearn of IDS says that many firms which had secured lower increases in 2007 in the expectation that inflation would fall have had to agree to higher rises this year to restore purchasing power.
Whether workers succeed in resisting a fall in their living standards will depend mainly on the balance of power in the labour market. This seems to be tilting towards employers, as unemployment starts to rise. But the big influx of workers from eastern Europe since 2004, which helped to keep a handle on pay pressures, is slowing as new arrivals dwindle and some longer-established workers return home.
Political will also has a role to play. Unions are strongest in the public sector, and garbage left to rot in the summer sun is already promised. Mr Darling may find that too much for even his sangfroid.
Wage awards have already begun to move up, according to Incomes Data Services (IDS), which monitors them. For most of the past year or so, the median pay settlement was typically 3.5%, but in the three months to April it rose to 3.8%. And total earnings, which include bonuses and overtime, tend to increase faster than basic pay. Ken Mulkearn of IDS says that many firms which had secured lower increases in 2007 in the expectation that inflation would fall have had to agree to higher rises this year to restore purchasing power.
Whether workers succeed in resisting a fall in their living standards will depend mainly on the balance of power in the labour market. This seems to be tilting towards employers, as unemployment starts to rise. But the big influx of workers from eastern Europe since 2004, which helped to keep a handle on pay pressures, is slowing as new arrivals dwindle and some longer-established workers return home.
Political will also has a role to play. Unions are strongest in the public sector, and garbage left to rot in the summer sun is already promised. Mr Darling may find that too much for even his sangfroid.
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