With recent strike action across many public sectors and the current economic challenges, raising workers wages to reflect the hikes in inflation is clearly at the forefront of most people’s minds.
But according to chancellor Jeremy Hunt, wage increases that fuelled inflation would have a “more damaging” impact on the UK economy. Determined not to give in to demands, he has also said agreeing to pay awards without increasing inflation was an “incredibly difficult balancing act that we have to get right”.
The UK workforce has faced years of stagnant wages. Although the average monthly salary increased by 6.5% in the three months to January of this year, the ONS found that, when adjusted for inflation, growth in total and regular pay fell by 3.2% for total pay – one of the largest falls in growth since comparable records began in 2001.
Labour market economist, Ian Brinkley, feels the government believes that if average wages grow to match inflation, corporations pass on higher prices to the public, which then feeds into inflation. “This is sometimes called a price-wage spiral. By keeping wage rises down, inflation will fall faster than it otherwise would and that will be better for society and the economy as a whole.”
There may be something to this, but Brinkley also suggested that this rationale in the public sector is unlikely to impact the whole UK economy. “Wage deals in the private sector matter much more for inflation because they cover many more people, but the government has little or no direct control over what firms offer. Secondly, higher wages in the public sector will make some public services more costly, but do not for the most part impact directly on consumer prices.”
John Philpott, director of The Jobs Economist agrees, “In theory, big public sector pay hikes are only likely to be inflationary if they encourage private sector workers to seek much higher pay too. But historical precedent suggests this is highly unlikely.”
Director of the Institute for Employment Studies, Tony Wilson, feels that the chancellor might be right to a point, explaining “He’s probably right in that judgement, as we would have to either raise taxes, borrow more or cut spending elsewhere to fund that higher pay, and none of those options are particularly palatable at the moment.”
However, Junior doctors are striking to demand a 35% pay increase to compensate for 15 years of paltry pay increases well below inflation. In fact, the British Medical Association claims that junior doctors in England have seen a 26% real-term pay cut since 2009.
So, should these, and other key workers be forced to pay the price for the greater good, or could the potential impact to the UK economy be less harmful than we’ve been led to believe?