The wage-price spiral myth?

Should workers ask for a pay rise? Exploring the relationship between wages and inflation, the state of public sector pay, and whether we are seeing a ‘profits-price spiral’.

Source > New Economy Brief

22 June 2022

Fanning the flames of inflation? As RMT members press ahead with strike action this week, Boris Johnson has warned of a ‘wage-price spiral’ should workers demand higher pay. In a speech delivered in Blackpool earlier this month, the Prime Minister said that wage increases could ‘fan the flames’ of inflation and argued that the ‘one cure’ to such a spiral would be ‘to slam the brakes on rising prices with higher interest rates’. The sentiment echoed Andrew Bailey’s instruction to workers not to ask for a pay rise and Treasury minister Simon Clarke’s warning that employers should be ‘very careful’ in setting pay rises. 

  • Are wages rising? Warnings of a wage-price spiral come as real pay in the UK falls at the fastest rate in at least 20 years. Figures for April this year saw a drop in pay of 3.4%, the highest monthly fall in pay in two decades, according to ONS figures which date back to 2001. The Resolution Foundation’s Torsten Bell notes that average pay fell, in real terms, across the months of March and April and said that anyone seeing signs of a wage-price spiral must have had ‘something strong in their coffee’. 
  • The response. Following the PM’s Blackpool speech, 67 leading economists and economic policy experts wrote to the Prime Minister saying that his warnings of a wage-price spiral were misplaced. The letter argued that inflation comes from ‘huge external factors’, and ‘is not a product of domestic wage demands’. Economists urged the government to take further action to combat the cost of living crisis with ‘substantial increases in the minimum wage, public sector pay, and social security payments.’ The TUC held a ‘Demand Better’ rally on Saturday 18th June (livestream recording here). 

A myth? Grace Blakeley argues that the current ‘wage-price spiral’ debate is based on a myth and that any current union action is focused on demanding wage increases in line with inflation, not above it. With workers ‘simply not in a position to demand higher wages’, external factors such as the war in Ukraine and supply chain issues clearly have a much stronger impact on inflation than wage demands, she argues. 

  • It’s not the 1970s. Meanwhile, a wage-price spiral is unlikely due to weak unions and a fragmented labour market, argues Sarah O’Connor. Comparing the current situation to the 1970s makes little sense when only 23 percent of workers are unionised compared to over half of employees during the peak of union membership, she explains. What’s more, only 13.7 percent of private sector workers now have their pay set by bargaining between unions and employers and much higher percentages of self employed workers mean that the relationship between wage setting and inflation looks very different in 2022. Likewise, Sam Ashworth-Hayes argues in the Spectator that wages will only rise due to a labour market running hot, not because of successful union bargaining. 
  • Overshoot: Even the Bank of England have admitted that it is not wage claims that are driving this inflation crisis, arguing recently at a select committee that around 80% of the inflation overshoot was driven by external shocks with only 20% caused by the reaction of firms and wages.

Public sector pay. There is little evidence of a wage-price spiral taking hold, argues Richard Partington. While headline pay has risen by 8% in the private sector, public sector workers are seeing pay growth of only 1.5%, making this ‘the worst decade for real-terms pay growth since the Napoleonic war’. In real terms, nurses and paramedics are £2,000 a year worse off, while pay growth in the education sector is at just 0.3%. On Monday, Simon Clarke, the Chief Secretary to the Treasury, confirmed that public sector workers should not expect a pay rise in line with inflation and therefore should expect a real terms cut. 

Profits-price spiral. Inflation is being driven by run-away profits, not wages, according to new research by the IPPR and Common Wealth. The analysis finds that the profits of the largest non-financial companies were up 34 percent at the end of 2021 compared to pre-pandemic levels. However, these profits are highly concentrated, with only 25 firms making up 90 percent of increases in profits. Furthermore, these companies are mainly located in a small number of industries – particularly in energy. With such considerable market power, these companies are able to drive up prices and have a disproportionate impact on the cost of living, the report argues. Common Wealth has summarised the key findings of the report in this thread and the IPPR’s Carsten Jung has more detail here

  • ‘Using inflation as an excuse’. Servaas Storm argues that by using ‘algorithmic pricing and AI’, large corporations are using inflation as an ‘excuse’ to drive up prices and increase profit margins, which they are able to do thanks to their large market share. 
  • Across the Atlantic. Hal Singer, managing director of Econ One, argues that the answer to the cost of living crisis in the US is not to curb wages or to raise interest rates but to tackle monopolies and to pursue ‘anticompetitive conduct’. ‘Biden needs to communicate to the public that he supports efforts to tamp down inflation outside of the traditional interest-rate-hike paradigm’, he argues. (For more on New competition policy emerging in the US, see our previous digest.)
  • Competition policy in the UK. Andrea Coscelli, CEO of the UK’s Competition and Markets Authority warned that uncompetitive markets are driving up the cost of living in the UK: “The level to which markets are dominated by a limited number of companies is higher than before the 2008…If competition is weak, firms do not face the same pressures to keep prices down”. Michelle Meagher, John Christensen and Nicholas Shaxson have launched the Balanced Economy Project to tackle monopolies and excessive concentrations of market power around the world. 

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