No 252: Day of Strikes but more Inflation?

HALF a million workers are on strike today in the UK. It involves state school teachers, university lecturers, civil servants, train drivers and bus drivers. Although NHS workers like nurses and ambulance drivers have been striking recently, they are not today. (See this BBC article for further details about today's strikes.)

It is striking (haha) that most of these workers are public sector employees who are therefore directly negotiating with the government. These workers argue that their wages have not been keeping up with inflation ever since 2010, when the government of that time initiated "austerity policies" - spending cuts (including freezes on pay rises to state employees) to pay back the government borrowing to relieve the 2008 financial crisis. Recent high inflation has of course made the real wage situation even worse for these workers.

The government says it cannot award large pay rises because it does not have the money, and because such wage rises will only add to inflation, thereby only serving to make the economy worse.

Certainly government finances are not in a strong position - as stated in an earlier post, public sector borrowing in December was the highest for that month since it began being recorded. But if these pay rises were awarded, would they be inflationary?

Any extra income for households is likely to lead to additional consumption. As we know from our lessons, the resulting shift on AD would create a higher price level but we also know it also leads to more real GDP - which is something else the UK does need quite desperately.

But the government is not talking about this "demand pull" inflation. Instead it arguing that pay rises will lead to a "wage-price" spiral. This is when firms have to raise their prices due to having to pay higher wages. However the higher prices then mean workers want higher wages again, and if they are given them, firms will once more have to raise prices, and so on and so forth. It all results in higher and higher rates of inflation.

We could picture this on a diagram as a series of inward shifts of SRAS. As well as the higher and higher price level, paying more wages would either force some firms out of business or force others to cut their workforce - leading also to lower GDP. This then is definitely a situation to be avoided!

 But I would argue it is not the current situation. Remember that many of the workers striking today are public sector workers. If government has to pay higher wages to, for example, teachers, it does not follow that it will then put up the "price" of education - since state school education is free (at least at the point of use). It would be same for other government workers, including those in the NHS.

There is no doubt it would be hard to find the money to fund these public sector wage rises. But it would seem the inflationary impacts may not be as high as the government claims. Having read this,  next time you are having a conversation with a government minister you can say, "I think you are exaggerating the impacts of the wage-price spiral, which does not really apply to public sector pay rises...." :)