National rail strikes, and the threat of industrial action by groups from barristers to BT engineers have raised the spectre of the 1970s. The “winter of discontent” in 1979, that ghost of Christmas past that has haunted British politics for over 40 years, is summoned to warn of the chaos and disaster that over-mighty unions bring to the country. Boris Johnson himself is warning of a 70s-style “wage-price spiral”, as pay rises chase prices ever upwards. This fantasy of a return to the 1970s is not just wrong, it is an inversion of today’s reality.
There is no “wage-price spiral” because wages are falling far behind prices. Data from XPertHR put the average pay deal over the last three months at a 4 per cent rise, even as inflation hit 9 per cent in April. A spiral has two arms, each one pushing the other. If one of those arms doesn’t exist, neither does the spiral.
Instead, for inflation today profits are playing a radically different role. Profits in the 1970s fell sharply as higher wages and salaries ate into companies’ cashflows. As a share of GDP, company profits fell to an all-time low in 1975.
They have been recovering rapidly in recent years, however. A new paper from two think tanks, the Institute for Public Policy Research (IPPR) and Common Wealth, provides the evidence showing that while global forces such as the pandemic, extreme weather and Russia’s invasion of Ukraine are driving up prices across the world, increases in costs have been amplified in the UK by the market power of major companies.
Using detailed company data Carsten Jung and Chris Hayes, the paper’s authors, show that profits of the largest companies were up 34 per cent at the end of 2021 compared with pre-pandemic levels. These dramatic pandemic gains were heavily concentrated among the largest and most powerful companies, with 90 per cent of the increase in total profits accounted for by just 25 of them. Price spikes in specific markets, such as gas, have handed exceptional gains to a small number of producers in those markets, with BP and Shell generating extraordinary profits. But the researchers indicate that “excess profits”, built on companies leveraging their market power, are likely to be more widespread and account for a substantial part of the broader price increase.
Far from a wage-price spiral, what we are witnessing looks like the exact opposite: a “profit-price spiral” in which large companies, exploiting broader economic instability, are able to make excess profits through rising prices. The result is a transfer of wealth and income away from those who work and wider society into the hands of a limited number of large companies and their owners.
Far from discouraging pay increases, pay rises should be high – meeting, and ideally exceeding, the rate of inflation – and profits should be suppressed, with a solid case for an excess profit tax, as the IPPR/Common Wealth report suggests.
Calls to limit pay rises to the rate of productivity growth, as Network Rail’s boss is now insisting on, are similarly confused. In Britain, productivity growth has been flat for a decade, lagging behind even the reduced rates of post-2008 crash growth of other countries. But investment by businesses, the key driver for future productivity gains, has slumped since the 2016 Brexit referendum. The upshot is that the chances of productivity improvements in the future are limited, and it is unreasonable to try to peg wages and salaries to decisions about investment that owners of British companies are failing to make. Inflation today is a problem of the distribution of economic output, not of the growth of that output.
We should expect more strikes and more protests. There is both the incentive, in the form of those excessive profits, and there is the opportunity to take it, in the tightening of post-pandemic labour markets. For those in the public sector the situation is more complex. If profits are to be squeezed to cover the costs of public sector wages, it will require a political decision to use taxes to do so, like the windfall tax recently applied to oil and gas companies. The same argument against excess profits also applies in the aggregate, and could (and should) be used by public sector strikers.
Unlike in the 1970s, unions today are weak and union membership far below the 50 per cent of all employees it reached in 1979. Membership is concentrated mainly in the public sector and, prior to the pandemic, strike days taken were low and falling.
But there may be one way in which the 1970s comparison can work: high inflation, union activism and (crucially) low profits drove a radical change in the way in which economic policy was conducted in Britain. The “winter of discontent”, when the tolerance of mainly lower-paid public sector workers finally snapped, helped to bring to power a new government in 1979, committed to breaking with the post-war consensus. It was a critical moment in the consolidation of neoliberalism in Britain.
A similar breakdown in the economic order is now underway, as the persistence of old, dysfunctional ideas – such as the “wage-price spiral” – should tell us. And that creates, in these strikes and the protests to come, the possibility of a similar break with a failing past. Far from a winter of discontent, the next few months could be the British labour movement’s glorious summer.
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