Andrew Bailey wants British workers to think again when they ask for an inflation-busting wage rise. “I’m not saying nobody gets a pay rise, don’t get me wrong, but I think, what I am saying, is we do need to see restraint in pay bargaining otherwise it will get out of control,” the Bank of England governor told BBC radio.
With inflation already high and soaring skywards to more than 7%, Bailey was warning that Thursday’s increase in interest rates to 0.5% would be the first of many if workers did start a rush of demands for double-digit wage increases.
Such comments from someone who earns £495,000 a year were met with a hostile response from unions, while the PM’s spokesperson sought to distance No 10 from them. Summing up the general feeling, Unite boss Sharon Graham said: “Why is it that every time there is a crisis, rich men ask ordinary people to pay for it?”
Yet this has not always been the trade union position when economists plead for help slow rising prices. In the three years after the 1974 election, unions pledged to do their bit to keep wages below inflation – just as now, when pay was soaring after an energy shock – as part of a social contract. But in 1977 unions abandoned the vow and have not made such a commitment since.
In 1975, the first year of the deal, pay increases spiked at 29.4%, above the annual inflation rate of 25%, but in the two succeeding years, real wages fell.
In contrast, wages growth without bonuses stood at 3.8% in November last year – the most recent month for which official figures are available. The Bank of England’s monetary policy committee, which Bailey leads, estimates that pay growth rose a little higher last month to 4.5%.
Bailey expects wage demands to increase dramatically from this level, after vacancies hit an all-time high of 1.1m and employment became “the first, second and third” item on the agenda of every employer he spoke to on trips round Britain. Bailey says his stance is backed by the Bank’s staff in regional offices, who take the temperature of local businesses.
But while these chats may provide a useful guide, they are not definitive when the firms consulted are self-selecting and most likely members of their local chamber of commerce. They are not the down-at-heel, call centre businesses that pay rockbottom wages. Official statistics face the same problem. They ask questions of firms that tend to be better resourced and are prepared to fill in forms.
Skill shortages caused by Brexit and the pandemic mean there are sectors where reports of rocketing salaries are a daily occurrence, such as the legal, accountancy and tech industries. At the other end of the pay scale, many hotels have gone from the national minimum wage in favour of something a little more generous.
But these positive stories are offset by reports on the pay bargaining of millions of low and middle earners, which showed settlements last year increased from 2% to 2.5%. Such increases are unlikely to trouble those fearful of a 1970s-style wage-price spiral.
Sign up to the daily Business Today email or follow Guardian Business on Twitter at @BusinessDesk
Hours after Bailey made his plea, the Bank’s chief economist Huw Pill, revealed why the governor was so keen for workers to keep their wages in check.
Pill said the central bank’s forecasts for inflation were based on wages remaining well below inflation. The fear is that “second-round effects” from higher wage demands would feed into future business costs, leading to still higher prices.
So Bailey’s warning, however poorly received, was meant to work as an insurance policy, not a prediction. The Bank knows that with trade union membership at little over 6m and the gig economy employing millions, workers are emerging from the pandemic with strength in some areas, but not across the board and not enough to recreate the 1970s.
