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Inflated fears of a 1970s comeback

Rising unemployment has given employers an upper hand in pay negotiations

Do you remember the winter of discontent in 1978-79 under the Labour government of Jim Callaghan with Denis Healey as chancellor?

That winter, the two men sat down and had a discussion about the impending pay round. It would be nice to keep the increases in single figures, they thought.

Fat chance – the car workers put in a demand for 30%. Yes, 30%. In those days the car workers tended to set the benchmark for pay deals across British industry, and back then the manufacturing sector was a much more significant part of the economy.

If it was good enough for British Leyland workers, everyone argued, it was good enough for them. The upshot, was that the car workers settled for about 18%, five percentage points above the rate of inflation. So Callaghan and Healey’s fantasy of single digit pay deals went out of the window of the average Austin Princess – remember those?

In the past couple of weeks there seems to have been a great deal of fuss about how pay may be making a return to a 1970s-style inflationary spiral.

Indeed, the chancellor, Alistair Darling, and Treasury minister Yvette Cooper have warned against a return to the dark days of the 1970s, when inflation peaked at 27%.

Is this because the slowdown in the economy and the rise in inflation to a heady 3.3% have given rise to discussion of the 1970s “stagflation”? Or might there be something more to this?

The trigger for the concern was the Shell tanker drivers winning a 14% pay rise and now public services union Unison, the country’s second largest, is threatening to strike over pay. Two civil service unions, the PCS and Prospect, have started a series of one-day stoppages.

But a quick glance at the Unison dispute, involving 600,000 workers, shows how far we are from the 1970s. They have rejected 2.45% and are demanding 6%.

History suggests they will settle somewhere between those two numbers, probably in line with the current retail prices index – at 4.3%.

So it is important not to get carried away. And, as ever, it is worth looking at all the relevant data.

Let’s start with inflation. It is true that the consumer prices index (CPI) measure of inflation, at 3.3% is its highest since 1992 and the Bank of England expects it to go higher, possibly above 4%, as the recent surge in energy and food prices passes through the data. But thereafter the Bank expects the CPI to fall back, as it did a year ago.

The RPI measure of inflation went above 4% at the end of 2006 for the first time and has generally stayed there since. RPI is the benchmark most pay bargainers use, so one would expect pay deals to have picked up sharply.

According to Ken Mulkearn of pay specialist Incomes Data Services, wage settlements picked up modestly, to about 3.8%, last year but remained below the rate of inflation.

“However, the current picture is a long way from describing a ‘wages-prices spiral’. In the past we have commented that settlement levels ‘hung like washing’ from the hoisted inflation line. This is the broad picture at present,” Mulkearn says. He argues that public sector pay deals are over one percentage point lower than in the private sector because of the government’s squeeze on pay. Hence the 2.45% offer to Unison.

“It certainly doesn’t follow from the recent modest pick-up in settlement levels that we’re returning, a bit like Sam Tyler in the BBC sci-fi serial Life On Mars, to a version of the 1970s,” Mulkearn adds.

Ah, you say, that was last year before the latest round of oil and food price rises came through, and when they push the inflation figures up, pay deals will surely rise again.

But last year the economy was booming, growing at 0.7% a quarter. Figures out on Friday showed first quarter growth was revised down to 0.3%. Since then the economy has almost certainly slowed further and soon may well stop growing altogether.

That will have an effect on the labour market and on pay. Unemployment, after long years of falling, is now on the rise again as the economy slows.

And that affects people’s attitude towards pay demands. As Bank of England deputy governor Sir John Gieve told a parliamentary committee last week: “In my experience when workers are worried about their employment prospects, they push less hard for pay rises.” His monetary policy committee colleague and noted hawk Professor Tim Besley said: “Workers are very realistic about the situation in the economy. And if that realism prevails, and I think it will, there will be an absorption of these higher costs.”

But Besley, Gieve, and Bank governor Mervyn King all stressed that the Bank was not taking this for granted and would be vigilant about pay pressures. Indeed, the Bank has worried about pay – that’s what central banks do – for the past decade when wages remained remarkably steady.

The latest figures on pay are also surprisingly soft. The EEF industry employers’ group recently reported that the average pay deal in manufacturing – a sector which has been doing reasonably well in the past year or more – had dropped for the third consecutive month to its lowest for 18 months at 3%.

Last week pay specialist Industrial Relations Services (IRS) reported that the average pay deal across the economy in the three months to May was 3.3%, comfortably within the 3-3.5% range that has prevailed since early 2007. What’s more, only 9% of the deals IRS monitored were at or above RPI; the other 91% were settled below it.

IRS said its data suggested that “employers have gained the upper hand in pay negotiations” as below-inflation pay awards are a reality for the majority of workers.

This is a key point. Companies are facing the same higher energy costs and slowing economy that we are. So they will squeeze pay to contain costs.

The Office for National Statistics’ data on average earnings is not flashing any alarm signals either. Year on year earnings growth in May actually slowed, to 3.8%. That figure is bang in line with the average of recent years and so can best be described as completely static.

Vicky Redwood at Capital Economics thinks wage growth will remain “the dog that didn’t bark”. She says: “The degree of wage restraint has already been severely tested and has passed with flying colours.”

I agree. We are not about to shoot back to the 1970s and those Austin Princesses.

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