George Kerevan

George Kerevan

Profits, Not Unions, Are Driving Inflation

Reading Time: 4 minutes

George Kerevan argues comparisons to wage-price spirals make no sense today, when wages have been stagnant for decades.

This week’s rail strikes are only the beginning of a long summer of resistance from trades unions. There is absolutely no assurance that inflation is going to moderate. Remember that last year the Bank of England was predicting that inflation would be a short-run event. That seemed pretty far-fetched at the time. Of course, we have had the impact of the Ukraine war, which has added to energy and food costs. But even before that, it was obvious that the disruption to global supply chains post-Covid was not going to be resolved quickly.

Looking forward, the OPEC oil producers are still in no hurry to pump more hydrocarbons. If the war in Ukraine staggers on, grain prices will continue to rise. We can also see core inflation spreading from the energy and food sectors into the rest of the economy. A key indicator here is producer prices – what firms charge each other. UK output prices are up a massive 14 percent on the year, driven by more expensive metals and minerals. And above all, the UK labour market remains tight. The outlook is much the same elsewhere. US consumer inflation just hit an annualised 8.6 percent.

Central banks are responding by raising interest rates. The Bank of England has raised interest rates five times since last December, with more to come. That’s added £320 to the cost of a £200,000 variable rate mortgage. In other words, the response of the bankers is to…add to inflation.

If inflation stays with us over this and the next wage bargaining cycle – as I think it will – then workers will resist cuts to their living standards. Politicians north and south of the Border will resist these wage demands by claiming they are self-defeating and only lead to further price rises – the so-called wage-price spiral.

The historical example that is normally hauled out to attack union wage demands is what happened in the inflationary 1970s. Then, militant trades unions were able to demand and extract big money wage rises. But supposedly this only led to companies passing on the increases by hiking prices. Result: a wage-price spiral that killed investment and led to permanent economic disruption. The current Tory government is making great play of this alleged toxic spiral being repeated.

However, what actually occurred in the 1970s is very different from how it is mythologised today. The detonator of inflation in the 1970s was not union militancy but the Vietnam War. In order to fight that war, America printed billions of dollars to purchase military equipment and raw materials. US domestic prices doubled, the fastest rate of inflation in that nation’s history. Interest rates skyrocketed. Because the world used US dollars for trade, this extra cash soon spilled across the globe, raising prices everywhere. The 1973 Middle East War only added to the crisis, resulting in a global oil embargo. By 1975, UK inflation was over 20 per cent per annum (far worse than now).   

It is at this point the role of trades unions became an issue. If inflation is cutting living standards at the rate of 20 per cent per annum, the unions are going to try to protect their members. The inflation was not their fault but they had an obligation to defend the living standards of their members. That is what unions are for, after all. But the then Labour government did not see it that way. Efforts were made to curb wage demands through state intervention. But this failed for one obvious reason: the inflation cycle was not caused by the unions, it was caused by exterior factors. Just like today.

The main difference between then and now was that strong unionisation prevented living standards from being hurt. For instance, in 1975 – the peak year in the decade for price rises – wages rose by nearly 30 per cent. As a result, consumer spending held up. This strong consumer spending meant the economy continued to grow. Economic growth through the 1970s averaged around 2.6 percent, much better that in the past 30 years. The highest growth rate was in 1973 at 6.5 percent.

Yes there was the so-called Winter of Discontent in 1978-79 but this was caused by public sector workers demanding equivalent rises to those in the private sector. The lead given by private sector workers – particularly in cars, mining and engineering – set the pace for public sector workers to demand equal pay rises. The overall effect was to raise the share of wages in total GDP. In the mid-1970s, the share of wages as a percentage of output in the UK hit an all-time high of 64 percent – the rest went to profits and rent. This is why Thatcher spent her time crushing the unions and dismantling (literally) the mining and car industries.

The record share of wages in GDP in the 1970s raised real living standards dramatically despite the inconvenience of inflation. But with the attack on the trades unions after 1979, the share of wages in the economy has fallen precipitously. By the late 1990s it had collapsed to around 51 percent of GDP. There was a modest recovery at the start of the new century, to around 54 percent – where it has stuck. Meanwhile, the share of profits in GDP rose significantly to around 28 percent at the start of the 2008 banking crisis.

We are supposed to be in an independence campaign, but trades unionists won’t be persuaded to vote for independence if they think it will be business as usual on the wage front. This is especially true of Scotland’s half million public sector workers. The SNP government should back local authorities borrowing to protect public sector living standards over the next two years. The accumulated debt can be written off after the independence they are promising. The SNP government has to show it is willing to challenge UK Treasury orthodoxy.

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