Friday Reflections – Pay and Inflation

I’m not economist but I have been reading the headlines this week about pay and yet more strikes which really got me thinking. Not a usual post from me, a little heavy, but I’m going to ask for you to be generous with me as I work through my thoughts on the topic and forgiving if I get any of this wrong – I don’t have a plan for this either so I’m not sure it will end with any answers!

“Negotiation and discussion are the greatest weapons we have for promoting peace and development.” Nelson Mandela

So first of all let’s look at the facts (well according to the governments statistics): Ignoring an anomaly when we returned from the pandemonic pay in the UK has risen at it’s the fastest pace for over 20 years, rising 6.4% between September and November. However, this average increase actually breaks down as 7.2% in the private sector and only 3.3% in the public sector.

Unemployment remains at a historical low and job vacancies, whilst failing slightly still remain at a historic high.  Inflation is at 10.7% showing the continuing rate at which prices are increasing in turn driving the cost-of-living crisis. The governments plan is to half inflation this year and the Bank of England has raised interest rates in an attempt to support this.

With all this context, a labour market with low unemployment and high vacancies numbers, favours the employee – as it is hard to recruit and with rising rents, fuels, and costs employers may need to offer more pay to attract people. Where there is high demand for labour you potentially also have to offer more to retain talent. These market forces will drive up pay rates. Although as a side note I do appreciate this picture is not reflective for everyone right now with an increase in redundancies too.

Having been involved in numerous pay negotiations with various Trade Unions during my career I can completely understand the argument they will be making, and which is resulting in the current pay talk deadlock and industrial action we are seeing. If we take the case for the public sector as a whole as an example then if pay in this area has increased by 3.3%, as the figures suggest, then that is clearly not keeping up with the rising prices so represents a real terms pay cut of 7.4% and that is before you then take into account any historic under inflation pay increases which may have compound the issue further. Hence unions asking for the double digit pay awards we are seeing.

However, whilst I understand this argument, having sat on the employer’s side of the table all my career I cannot help but wonder how all that is paid for. Most business’s I have worked for operated on a margin anywhere between 5% and 20%. Clearly businesses are not immune to this hyperinflation either so their costs will be increasing too. The cost of fuel, utilises etc will already be eating into their margins significantly. The wage bill is often the largest chunk of a companies operating expense so a further 10% here and the margin is gone. The only way to survive therefore to increase your prices as it is hard to reduce your costs when they are all rising – unless you do something drastic. Yet if you increase your prices then aren’t we just compounding and continuing the high inflation world we live in and so where does it stop.

This I believe was the argument the governor of the bank of England, Andrew Bailey made last summer when he said “if everybody tries to beat inflation – and that is both in price-setting and wage setting – it doesn’t come down it gets worse… if inflations becomes embedded and persistent, it gets worse.”

So if employers can not afford double digit pay increases without increasing pricing and in doing so compounding inflation and employees, especially those on lower pay, can not afford to keep up with spiralling prices – how do you square this circle? How do we bring an end to the strike action across, rail, postal services, nursing and now teaching? However, it seems not all economists agree with this outcome and suggest resisting giving fair pay increases and increasing poverty is actually likely to accelerate the onset of a recession. So what is the answer?

From CIPD research last year it seems offering improved flexibility and extending remote working are being used to attract candidates, however, this doesn’t resolve the pay talks. Clearly good industrial relations are key and being open and transparent about what can be afforded and the consequences of overstretching costs. Looking at solutions like remote working which save on travel costs, financial support packages and education, wellbeing, increased flexibility and one-off lump sum payments through this period without increases your on-going costs can form part of an overall solution (an approach Lloyds took last year) that expands the conversation behold just pay may help. But in my research, perhaps unsurprisingly I have not found a magic wand.

I would love to know what you think and what your business or your union is doing to resolve the apparent and understandable loggerhead we are in.