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The Wage-Price Spiral Is a Myth

The government and the Bank of England have joined forces to force workers to pay for the cost of living crisis – but it’s profiteering, not wage demands, which is driving inflation.

Boris Johnson—who earns a Prime Minister’s salary of £164,000 per year—has warned of a ‘wage-price spiral’ if workers do not temper their salary demands. (Peter Byrne - WPA Pool / Getty Images)

Anyone observing the political debate about inflation in the UK could be forgiven for thinking that rising prices were being driven by rising wages. Politicians and technocrats from across the political spectrum have taken it upon themselves to chastise workers for demanding wage increases in line with inflation.

These calls for wage restraint were intolerable enough when they were coming from the head of the Bank of England, Andrew Bailey, who earns more than half a million pounds a year. Now Boris Johnson—who reportedly found it so hard to survive on a Prime Minister’s salary of £164,000 per year that he had to approach a Tory donor to buy him some new curtains—has entered the fray.

Johnson has warned of a ‘wage-price spiral’ if workers do not temper their salary demands—as have several Conservative and even Labour MPs. Well-paid politicians who have repeatedly voted to increase their own salaries while holding down those of nurses and teachers are now telling the rest of the country not to ask for higher wages. The spectacle might be funny if it were not so elitist.

The Conservative Party didn’t seem to have a problem dishing out billions of pounds worth of loans and grants to giant corporations who needed support during the pandemic. And this came on the back of several years of high profits for the UK’s largest businesses—partly driven by the drastic cuts to corporation tax introduced by George Osborne.

Meanwhile, the average worker in the UK did not receive a real-terms pay rise in the decade that followed the financial crisis, leaving the UK with one of the weakest performances on wage growth out of all OECD countries. Now, with costs rising, millions of families are finding themselves unable to heat their homes.

With rates of unionisation having declined almost every year since the late 1970s (with a notable reversal over the last few years), workers in most sectors are simply not in a position to demand higher wages. Those that are better unionised—notably in the public sector—are still only demanding wage increases in line with inflation. This is another way of saying that they are attempting to protect themselves from pay cuts.

The statistics show very clearly that the cost of living crisis is not being driven by workers demanding higher wages. The combination of the war in Ukraine and disturbances to supply chains that took place during the Great Lockdown are the main factors explaining higher prices. As I argued in Tribune last week, the crisis in global shipping is particularly important in explaining why prices have risen so much over the last few years.

But the issue isn’t simply macroeconomic changes that are beyond our control—it’s also the profiteering of large corporations in response to the inflationary environment.

Levels of market concentration have been steadily rising in the UK in recent years and monopolistic and oligopolistic sectors have seen higher price rises during the pandemic than more competitive sectors. These corporations are using economy-wide price increases as an excuse to raise their prices by a significantly higher factor than the increase in their costs. Much of the increase in prices is, in other words, being driven by rising profits, not rising wages.

Inflation is always and everywhere a political phenomenon—it is a question of who pays. This government wants to make workers pay for the cost of living crisis, just as it made them pay for the pandemic and the financial crisis before it.

The government’s callous approach to the cost of living crisis is precisely why it is so important for workers to unionise. Workers cannot rely on bosses providing ‘fair’ wage increases out of enlightened self-interest, nor can they rely on the government supporting wage increases to support the recovery. They have to demand the pay that they deserve from a position of power.

The response from both the Labour and Conservative parties to the recent rail strikes demonstrates quite clearly how threatened politicians feel by workers who dare to organise to defend their interests. In well-unionised sectors, bosses cannot simply shift the costs of rising prices onto low-paid staff—they have to bargain with the people they’re attempting to exploit.

This government—and most of the opposition—would quite like workers to sit down and shut up in response to falling real wages. But they do have another option: they can organise instead.