Wednesday, 18 June 2008

Wage restraint - not for me, thank you.

Inflation is picking up and suddenly the government wants everyone to tighten their belts and minimize their wage claims for the greater good.

Darling and King have just woken up to the possibility that the UK could be on the edge of a similar wage-price spiral to the one that afflicted the country back in the 1970s. Today, Darling even made an explicit comparison between the situation today and the chaos back then.

The plea is almost certainly a hopeless one. Back in the 1970s, when pay restraint was a serious policy option, the country had a few haphazard institutions that could make the policy stick. It is largely forgotten period, but during the late 1970s, the Callaghan government managed to reduce inflation through a serious of agreements with trade unions. Callaghan traded off lower wage growth with high public sector expenditure.

However, it all fell apart in 1979, when Callaghan tried the trick once too often. Today, that corporatist cohesion has disappeared. Today, there are no private sector trade unions that could collectively enforce wage restraint.

In any case, wage restraint works best when everyone feels that the sacrifices are shared. With the possible exception of the US, it is hard to find a country where the idea of shared sacrifices is more alien.

Over the last 25 years, income inequality has grown dramatically. The state owned enterprises were privatized; insiders grew rich, while millions of jobs were destroyed. Social housing has virtually disappeared, while the public services have deteriorated. The UK is a country where finance matters more than manufacturing, where profit is king and whatever is mine belongs to me alone.

We can debate whether these developments, on balance, left us better off. Opinions will differ. However, we can all agree that the transformation has made it impossible to confront inflation by a collective act of self-denying impoverishment.

No, I have thought about it. I want my income stream fully indexed for inflation. If someone else wants to take Darling's advice and become poorer, then go for it, but do not expect me to follow.


Vodka drinker said...

that just about sums it up.....

powerman said...

What was the most recent pay award for MPs again ?

What was the average pay rise for a FTSE 100 board member this year?

No, they can shove it, and I'm sure a lot of the unionised public sector workers will be thinking exactly the same.

Here's the problem:

I'm concerned we face too much overseas labour competition and too weak organisation of labour in the private sector to have the bargaining power to force wages up enough.

We might be looking at simply having to accept a lower standard of living.

Anonymous said...


I assume you have seen this on the housepricecrash site - I find the blog article at hofstra it links to,and more especially the previous one to it, fascinating and maybe a real insight into what is going on:

The endpoint may only come with a major realignment of our currencies against Asia's, and a consequent large drop in living standard for many, as per the comment above.

B. in C.

chriswov said...

Surely a fully indexed income stream on its own is not going to replace the shortfall of "stuff" that you wish to continue consuming . Robert Peston's recent blog says it all-too much "stuff" is being consumed by the older generation by cashing in on pensions and ridiculous sums of inherited wealth. Taking five or more holidays a year does wonders for the oil price.Younger people pay for this in the pyramid schemes known as pensions and house purchases believing all along that "that'll be me up there" after a few years.
All pyramid schemes,rather like the national lottery,are for people not very good at maths.
What we need and most probably will get is 1970's inflation .This will pay off my/our overdrafts/loans/mortgages
and at the same time drastically reduce the purchasing power of the coffin dodgers' savings and so stop them running up the price of everything ("stuff") with our money.

Anonymous said...

Um, Alice, have you thought about how the government is going to pay for the wage claims of the public sector loafers?

That's right, they are going to choose one of the following:
1) tax the private sector
2) tax our children
3) tax savers

Every single penny given up to the public sector is a penny stolen from the private sector taxpayers.

Unison or whoever can stuff their greedy pay claims. Why is it always the public sector wasters who are salary activists? Most of them shouldn't even have jobs because they were just created as make-work positions to keep the votes rolling in.

Hopefully the government knows it can't afford to pamper them anymore and tells them to shove it.

Bleating about fat cats is disingenuine when the bill is going to be paid by the average worker who wasn't complicit enough to ride the public sector bubble.

Apologies for the tone, but someone really needs to ask these people WHO IS GOING TO PAY FOR IT?


Alice cook said...


An incomes policy is not an anti-inflation policy. Cutting public sector wages will a) reduce public expenditure, b) possibly limit the fiscal deficit, c) attract low skilled workers, d) demotivate exisiting workers and e) generally ensure crap public services.

We can argue over the merits of public sector pay; you might want to pay them less and fire more of them, I might think otherwise. However, we can both agree that targeting their wages won't reduce monetary growth and it won't reduce inflation.

Why are unison the salary activists? Because when inflation picks up, public sector workers are the first to hear about wage restraint.


powerman said...

Arguing about efficiency in private and public hands is a worthwhile debate, but inflation is a monetary phenomenon, and as such what we're really debating is which prices the new money ought to increase.

Price inflation in the broadest sense doesn't make debts seem smaller necessarily.

It's specifically inflation in the income streams of the debtors which does this. You can always print more money, but you cannot so easily ensure that it finds it's way into working and middle class pay packets proportionately. If there's an unofficial policy of inflating away debts and future entitlement commitments, I really hope they've thought about this.

Alice, I'm still thinking over the reply you made about private and public wages still being closely coupled when I expressed concern that they may have become decoupled. I'm still quite concerned about this point.

Would you mind pointing me at some data on this? (you always seem to know where it is!).

Mark Wadsworth said...

"Social housing has virtually disappeared"

Woah! Around 20% of households are in social housing, down from a peak of 30% or so in the 1950s.

As to the reasons why the waiting lists are so long, that is another topic.

Besides, who wants to live in social housing?

Normal houses are dirt cheap to build, let's say £80k for a nice 3 bed semi. The problem is land prices, why on earth should a 200 sq yd plot of land cost £100k? That is the question.

(I know the answer, but you'll have to guess among yourselves for a while)

Anonymous said...


I picked on Unison because that's who happened to be on the front page of the Times today. They just agreed a pay claim and now want to tear it up. The bad faith is astonishing. Sure, there's bad faith from the government, but let's get this straight - all public sector raises must be paid for by private sector taxes. Whether the fault is fat cats, politicians or whoever, the bill nonetheless gets paid by the private sector suckers.

In simple terms, if Person A robs Person B, then Person B is not justified in robbing Person C to make up for the loss.

The main problem with crappy services is because they are public sector. There's no cost control when the taxpayer will always pick up the tab, and no work ethic when you're so unionised you can't be fired and the whole purpose of creating your job was to keep you off the streets.

Private sector hears plenty about wage restraint, only it's thousands of businesses carrying it out spontaneously. The government happens to set policies and do national bargaining which is why we hear such a fuss. The difference is merely the salience of the information, not a different reality.

Raising public sector wages is inflationary. Both in the Austrian sense of printing money to do so, and in the CPI demad-pull sense of giving these people money to spend.

I get a little emotional about this because I already pay more tax to support currently retired public sector workers than I'm able to put into my own pension. Rather than sponsor a panda or a starving kid, I'm being forced to support several public sector loafers. It's really galling that they then demand the government magics up extra cash just because they can't buy all the goodies they feel entitled to.


Anonymous said...

Nick: "I get a little emotional about this because I already pay more tax to support currently retired public sector workers than I'm able to put into my own pension."

Ain't that a fact. Some where around, it is reckoned that civil service pensions cost about 2p on the basic tax rate.

Add to that, the fact that no one on the government payroll actually pays tax, then you might understand why folk in the private sector feel a little 'tender' about the whole affair.

And one final thing, because of item two above, it is nearly always better for any task or function to be provided by the private sector, simply because the more people working in the private sector leads to more 'real' tax revenue and a more dynamic economy. which leads if more people are paying 'real' tax and less people are dependent on those tax revenues, to lower tax all round, or possibly raising the personal allowance to move more poor out of tax poverty.

Anonymous said...

Nick: "but someone really needs to ask these people WHO IS GOING TO PAY FOR IT?"

Nick, they don't care! The one constant they are sure of, they won't have to.

The fact is most of what is done in the public sector either doesn't need to be done, or could be done more efficiently, (cheaper or more effectively) in the voluntary sector. The trend under Labour is to co-opt the voluntary sector to the aims of the State, which is bad, bad, bad.

Anonymous said...

Mark, you know perfectly well why a small building plot costs £100K - it's an artificially restricted supply, due to the planning system. Scotland, for example, is the only example I know of a country with huge empty spaces AND a housing shortage; only the State could manage that.

To get back on topic, the One-Eyed Bandit caused the inflation by printing too much money; he can stop it by printing less money. He doesn't need my help.

Anonymous said...

I totally agree with Nick. As a private sector worker who has grafted for 22 years in my one and only job, it makes my blood boil when I hear the bleatings from the public sector about wages and conditions. If only I was as lucky, with their 35 hour week, gold plated pensions etc, all paid for by mugs like me. The galling thing is that they expect public sympathy!

Rick (another one) said...

There may well be wage restraint but it will be because people are scared of losing their jobs. As prices rise companies cut costs and outsource to low wage economies.

Pay is a function of power. Those who are well positioned in organisations, have scarce skills or collective power will get pay increases. Everyone else will see their pay beaten down.