Memory Lane: pay relativities

by George Hatjoullis

One of my enduring memories of the 1960s and 1970s was the endless strikes about pay relativities. One union achieved a pay rise and every other union sought one to maintain ‘pay relativities’. It was as if no one had heard of a labour market and relative pay structures had been set down in stone by a prophet and must be obeyed. Many of the industries that were most insistent were in the public sector. Employment was not subject to market realities in the public sector of this era. They nevertheless spread into the private sector with even more disastrous consequences. It was at root (in my humble opinion) the reason the car industry failed.

Relative price changes is the market’s way of telling you to do more of one thing and less of another. It facilitates a smoother transition. If relative prices are carved in stone then, if demand in one industry declines and in another rises, the signal to shift resources occurs via volume of sales. If pay levels in one industry are relatively high then relative employment levels fall as demand for the product declines. Except that in a unionised public sector this is not so straightforward. Coal, steel, shipbuilding, railways, bus drivers, tube workers, electricity generating staff, gas board staff, telecoms staff teachers, civil servants etc were all in the public sector. Firing people was a major problem because this was another excuse for strike.

The result was that declining industries retained higher than warranted employment levels and productivity increases proved difficult, all subsidised by the taxpayer. The relativities battle ( battles between unions, and between unions and the state) was the basis of the wage-price spiral. Every pay increase raised all wages and inevitably prices. Moreover, fear full of breaking the full employment promise, ensured successive governments validated this process by easy money and easy fiscal policy (no independent Bank of England worried about inflation in those days). High inflation and stagnation (stagflation) was the outcome.

The process was broken by Thatcher by destroying the power of unions to enforce pay relativities. The Miners regarded themselves to be at the top of the working food chain. This is why they were so militant. This is why Thatcher went for them. Once she broke the alpha worker class it all began to fall into place. She followed up by privatising everything that could be run in the private sector in order to ensure that aggressive union behaviour had direct employment prospects (as it had for British Leyland). She also eroded union power. The rest is history.

Today we have a Labour party that wishes to re-nationalise everything it can and increase union power. This does not mean we will return to the bad old days. One obstacle is the independent Bank of England. But independence can be changed by act of parliament. Another would be EU guidelines on budget deficits. Not a problem if we leave the EU is it Jeremy? So if you liked the 1960s and 1970s and want to return, vote Labour.