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Cost of living crisis: Labour Affairs on public sector pay and inflation

by Labour Affairs, with thanks.

British society as a whole is poorer because of the war it is waging against Russia.  The sanctions that it has imposed on Russia have resulted in dramatically higher energy prices.  Britain must give up a much larger share of its income to consume the same amount of energy.

How is this loss of income to be distributed throughout society?  Inflation is the main mechanism by which it is being distributed.  The current industrial disputes reflect the attempts by sections of the working class to limit what is, in effect, the consequence of the war on Russia on their standard of living.

Private sector workers are demanding and getting wage increases.  Private sector corporations are passing their increased costs onto society as a whole via increased prices.

According to the government, it cannot afford to pay public sector workers – nurses, ambulance drivers, teachers etc. – the wage increases that would maintain their standard of living.  That is a not the case.  The UK government can instruct the Bank of England (BoE) to lend it the money to pay these public sector workers whatever the government chooses to pay them.  Legally the BoE must do as it is instructed.

The national debt will go up by the amount that the government borrows from the BoE.  But since the BoE is owned by the government there is no urgency to repay any loan.  Indeed, it may never be repaid.  It is distinctly possible that the money, money that the BoE created and loaned to the government so that it could make Furlough payments during the pandemic, will never be repaid.

The unions almost always make a moral case for defending their living standards.  The moral case is simply that their members should not experience a drop in their standard of living.  The unions sometimes make the political case that more public sector workers are needed if better public services are to be provided.  Higher wages are, therefore, required to attract extra workers into the public sector. 

Unions rarely directly address the affordability issue.  They will need to, if they are to win their disputes.  To make the economic case, the unions must explain the effect that their demanded wage increase would have on the rest of society.  What might these effects be?

Would the increase in public sector wages directly lead to inflation?  Since public sector services like health and education are not sold in the market at a price, society as a whole would not experience any direct effect on prices from an increase in public sector wages.

Would there be any indirect inflationary effects?  When public sector workers receive increased wages, it seems reasonable to assume that they will increase their spending.  They will buy more food, clothing, energy etc.  But, will there be more food, clothing and energy available to be purchased?  And, if not, will the increased demand for food, clothing and energy cause the prices of these goods to rise?  

If there were unemployed workers and machinery in the society, then production could be increased.  The existence of unemployment is a sure sign that the government is not spending enough into society.  The high level of unemployment that followed from George Osborne’s austerity program was a clear indication that state spending was too low.  

The Office of National Statistics (ONS) estimates unemployment in Britain today to be less than 4%.  If that is the case, then it would be difficult to increase the production of goods and services to completely match the increased spending of public sector workers.

It’s possible, therefore, that prices would rise to some extent, but by less than the wage increase of the public sector workers.  So the latter would be better off.  Others who had not received comparable wage increases would be somewhat worse off.  However, we suspect that the ONS unemployment estimate is too low.  The figures treat only part-time workers as employed and underestimate the amount of underemployment.  In which case, there is more scope to increase production to match additional demand resulting from higher public sector wages.

At present, private sector workers are receiving higher wage increase than public sector workers.  Effectively, though not by design, the private sector, workers and corporations, are moving much of the cost of the Ukraine war onto public sector workers.  The government seem quite content to let public sector workers bear the brunt of the drop in the standard of living caused by the Ukraine war.  That will cause workers to move out of the public sector and so further the Tory government’s desire to reduce the size of the state.  This Thatcherite desire has not been met after four decades of effort.  Instead, state-subsidized enterprises become sources of private profit.  And overall, a much bigger portion of the society’s wealth go to the richest 1%. 

The unions need to understand and discuss these issues with each other to better counter the government’s arguments against making larger public sector pay awards.  The TUC should convene unions to co-ordinate a joint strategy for public sector and private sector workers to defend their living standards.

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