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Workers are right to seek pay rises

Paul MacFlynn


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Struggle: British families are nearly £9,000 worse off than households in comparable countries due to a “toxic combination” of low growth and inequality, according to a new report

Struggle: British families are nearly £9,000 worse off than households in comparable countries due to a “toxic combination” of low growth and inequality, according to a new report

PA

Struggle: British families are nearly £9,000 worse off than households in comparable countries due to a “toxic combination” of low growth and inequality, according to a new report

Given the experience of the last two and a half years of the Covid pandemic and the massive swings in employment and economic growth, you would think that we had reached our quota of shocking economic statistics.

Unfortunately, we do appear to be in the midst of yet another serious crisis. Last week the Office for National Statistics announced that the rate of inflation had increased to 9.4%.

We refer to this crisis, quite correctly, as a cost-of-living crisis. Very suddenly the cost of energy, something that very few households or businesses can live without, went through the roof. The latest figures indicate that the cost of energy is now infecting the cost of all other goods.

In order to respond to this crisis, we have to be very clear about where it came from. The war in Ukraine set off an energy price surge for both oil and gas.

Prices were already increasing as the economy came back to like after lockdowns, but the war in Ukraine sent it into hyper-drive. This is what has led us to our current predicament. It may sound pedantic to spell it out so simplistically, but it matters.

In recent weeks there have been an increasing number of reports of workers seeking pay increases to withstand the cost of living. These pay claims have received a rather frosty reception from policymakers.

Indeed, the Governor of the Bank of England has said that he doesn’t want to see any significant pay increases at all this year.

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When we look at the Northern Ireland economy as a whole we can see that pay packets were climbing back from a low point during the pandemic with an average increase in the region of 5%. With inflation running at 9.4%, this is actually a real terms pay cut of almost 4.5%.

If, for example, your wages were £400 a week last year and you got a 5% raise to £420 per week this year, you may not know it, but you’ve actually experienced a real terms pay cut.

When compared to last year, you’re actually only earning £382 a week. In seeking a real terms pay rise, workers are just looking to make up the difference. Why then would the Governor of the Bank of England be so hostile to such claims?

The Governor doesn’t want to see pay increases because he believes that this will send prices even higher. His logic is that if workers demand more pay, firms will see this as another increase in costs and so will increase their prices even further.

This would then set off another round of pay claims, and on and on. This is known as a wage-price spiral.

When we look back at previous episodes of high inflation, it is perhaps easy to see why the Governor and other policymakers are so skittish. The 1970s saw sustained periods of inflation and increases in pay that tried to outrun it. It did not end well.

However, the comparison between today and the 1970s is not an accurate one. Back then inflation was truly out of control. We didn’t know where it started and we really didn’t have any idea how or when it would end. Pay claims and prices took on a life of their own. However bad our current predicament may be, we’re not in that space.

Nevertheless, pay restraint is now put forward as the only responsible reaction to this crisis. But is it really responsible? If we were to heed the advice of those who say that wages must be held down, what would the impact on our economy be?

The reality is that spending and consumption in our economy would contract significantly. Less spend in our local economy means businesses having to close and jobs lost. There is every chance that such a strategy would pull us into a recession. For sure recessions tend to kill off inflation, but they also tend to kill off vast swathes of the economy in the process.

The worst part of this scenario is that even if we do bring about this recession, it is completely possible we still won’t kill off inflation entirely.

That is because the root cause of our current inflationary cycle is still external to us. As long as the war in Ukraine keeps stoking energy prices, no amount of self-flagellation on pay is going to save us.

Pay rises didn’t cause the current wave of inflation and therefore pay restraint won’t automatically bring it back into line.

Policymakers would do well to recognise the real economic dangers of the path they are bringing us down.

Paul MacFlynn is a senior economist and co-director of the Nevin Economic Research Institute (Neri)


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