by Ruth Lea, Senior Fellow in Economy of the Adam Smith Institute (July 17, 2008)
Council workers' call for a better pay deal are understandable, but we would all pay the price
The sight of council staff striking for inflationary pay awards of around 6% is as depressing as it is predictable. I appreciate, of course, that consumer prices inflation is rising, led by higher food and fuel costs, and many people's living standards are now falling. After a period of 10 to 15 years of uninterrupted growth and rising living standards this is a nasty shock for us all. And it is a particularly nasty shock for the less well off, including pensioners, who spend proportionately more of their limited budgets on food and utility bills.
But this is not all. Some people are now losing their jobs. Every day there is more bad news – for example in the house-building sector – but few parts of the economy will be immune as the economic slowdown tightens its grip. The unemployment claimant count rose by over 15,000 in June and, bluntly, this is but the start of a protracted period of worsening employment prospects. It is worth noting that the public sector is the least vulnerable section of the economy when it comes to insecurity of employment.
The chancellor argues strongly against inflationary pay awards throughout the economy – whether in the public or the private sectors. He is quite right. He knows that if the pick-up in prices inflation leads to higher wages then there is a real risk that an inflationary "wage-price spiral" becomes embedded in the economy – as it did to devastating effect in the 1970s. And the Bank of England has made it abundantly clear that if inflationary pressures build up further, they will raise interest rates. The economy needs higher interest rates like a hole in the head.
Inflationary settlements in the public sector do not, in themselves, directly trigger off a wage-price spiral, as their goods and services are not, on the whole, sold on the open market at a "price". Instead the provision of public services deteriorates – fewer school books for example – and/or council tax bills rise. But high pay awards in the public sector can increase pressure for inflationary pay awards in the private sector. And – surely the clincher – council staff workers must realise that they will be condemned as irresponsible and unfair if they push for high pay awards when their private sector friends may be losing their jobs.
Life is not pleasant for many at the moment and it's going to get worse. We're all in this together.
Published in The Guardian here