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20 December 2022

Strikes show how the dream of a high-wage economy died

The Conservatives have given up trying to reset what Boris Johnson described as a “broken model”.

By Duncan Weldon

Fifteen months ago, at his last Conservative Party conference as prime minister, Boris Johnson promised a “high-wage economy”. The UK, he said, in an apparent dismissal of Thatcherite orthodoxy, was “not going back to the same old broken model”. 

That was in October 2021. The speech followed several months of strong average pay growth – in both cash and real terms – and excitable talk, as labour shortages grew, of a new age of worker bargaining power. That speech also marked the end point of the expansion in real wages. While nominal earnings growth has remained reasonably strong by comparison with the past decade, the surge in inflation means that average real wages have fallen by 3 per cent this year (the biggest fall since 1977). This, combined with higher taxes, means UK households will likely endure the largest decline in living standards since records began in 1956-57.

The third real pay squeeze since 2008 has been met with a wave of industrial unrest. The latest data from the Office for National Statistics (ONS) put the number of working days lost to strike action in October at 417,000. That was up from 209,000 in September and 356,000 in August. By any definition these are significant numbers – in the five years before the Covid-19 pandemic the average monthly total was just 21,000.

December has seen strikes by rail staff, NHS workers and Royal Mail employees among others. Trade unions estimate that more than one million working days will be lost to industrial action in December, which would make it the worst month for disruption since July 1989. Even more typically militant countries such as France and Italy cannot rival the UK

Strikes, by their nature, are supposed to be disruptive. This is very much a feature rather than a bug. For the past three decades, however, while sometimes damaging to individual employers, strikes have rarely been a large enough factor to impact the macroeconomy. This appears to be changing. A million lost strike days represents around seven million lost hours of work. That alone – and assuming no knock-on impacts elsewhere – is a reduction in the total monthly hours worked of close to 0.2 per cent. 

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In reality, of course, knock-on impacts exist, even if they are tricky to quantify. A report by the Centre for Economics and Business Research estimated that three days of rail and tube strikes in June 2022 would reduce gross value added by around 0.5 per cent over the days impacted, purely through workers in other sectors not being able to get to their place of work. Those numbers varied by region depending on the reliance on rail and the ability of stuck-at-home commuters to work remotely. Rail-dependent London took the biggest hit. The total economic penalty from transport strikes is likely larger still. The ONS has been reporting weekly transactions at branches of Pret a Manger since the spring of 2021 – one of many unusual real-time economic data streams that gained prominence during the pandemic – and weeks with transport strikes see notable dips in spending.

Royal Mail strikes in advance of Christmas have become a major concern for firms reliant on deliveries, with hard-pressed consumers understandably reluctant to splash out on items that may not arrive in time. And then, of course, there is the immediate cost to the strikers themselves in terms of lost pay.

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The scale of the current wave of disputes is still a long way short of those seen in the 1980s or 1970s but it is now a material factor impacting British GDP for the first time in almost three decades.

And as long as the pay squeeze drags on, the industrial unrest will likely continue. The outlook for real pay is frankly abysmal. While the most recent inflation data showed a fall in the annual rate of price rises from 11.1 per cent in October to 10.7 per cent in November and sparked hopes that the peak has passed, it remains uncomfortably high. Based on the Office for Budget Responsibility (OBR)’s latest forecasts, inflation will still be 8.9 per cent next summer and almost 4 per cent by the end of 2023. More worryingly, the OBR expects the recession to cool wage growth over the coming months, meaning that real wages will, on its central forecast, keep falling even as the rate of inflation declines. The wage squeeze, in its estimate, will last until the second quarter of 2024. Given a forecast of two years of continuously falling real earnings – alongside tax rises and rising interest rates – the rise in the number of days lost to strike action is hardly surprising.

The squeeze is especially acute in the public sector. While total private sector pay rose by 6.8 per cent in the three months to September – still well below inflation – public sector pay grew by just 2.4 per cent in cash terms (meaning it is now at its lowest real-terms level since 2004). The gap between private and public sector growth in 2022 is at its widest for 20 years. With the level of job vacancies still higher than the number of unemployed workers, the public sector is facing a recruitment and retention crisis. To this will almost certainly be added an industrial disputes crisis in the months ahead.

After the pandemic, as the lockdown restrictions finally ended, British business rushed to recruit workers to serve expanding consumer demand. But with some employees leaving the country, others retiring early and a record 2.5 million people too sick to work, the supply of labour was reduced. The result was a few months of rising cash wages and a strong, although brief, bounce in real wages. 

But what was hailed as a new trend by some, was merely part of the post-pandemic disruption to the business cycle. As inflation surges real wages are once again falling – they are not forecast to return to their 2008 level until 2027. 

Rather than offering the high-wage economy promised by Johnson, Rishi Sunak and Jeremy Hunt are insisting that better pay is unaffordable. The end result has been a wave of industrial unrest, adding to Britain’s already severe cocktail of economic woes.

[See also: The Rwanda deal has been ruled lawful – but it’s bad news for this government]

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