There are reasons to be cheerful at the current persistence of below-inflation pay awards. This is according to Sunday Times Economics Editor David Smith. The headline pay award continues to fall further behind elevated inflation in 2011. But, Smith argues, if workers are "patient", then the current "misery will be replaced by happiness."
In a very interesting piece in the latest Sunday Times (20 February 2011), Smith contends that while below-inflation pay awards are having harsh consequences for UK workers' purchasing power in 2011, there are also some significant upsides. These are as follows:
•Subdued pay awards mean unemployment is lower than might have been expected given the severity of the recession. Smith says: "Wage restraint has enabled the labour market to share out jobs among a larger number of people than would be the norm in recession and early recovery in Britain. It is the other side of the pay squeeze coin."
•Persistent record-low interest rates of 0.5% are partly enabled by the ongoing weakness of pay awards, thereby preventing "a rise in interest rates [which] would intensify the squeeze on household incomes." As we have recently noted, the extent to which the current elevated inflation might feed through into public inflation expectations and in turn drive up pay settlements is of crucial importance to the Bank of England Monetary Policy Committee's (MPC) decision as to when and if interest rates should be raised.
Smith argues that the optimum outcome for the wider economy and for UK workers' pay packets is for inflation to fall back (as the February 2011 Bank of England Inflation Report predicts it will, once "temporary" factors such as "increases in the standard rate of VAT; higher energy prices; and higher import prices" fall out of inflation data), while both interest rates and pay awards rise gradually. Smith sets out his view of this ideal scenario as follows:
Falling inflation should cross over with gently rising pay settlements, at least in the private sector, to produce the return of rising real pay. In this Micawberite economy, misery will be replaced by happiness. As long as people are patient.
Citing latest evidence on trends in whole economy pay awards from the XpertHR pay databank, Smith says that there is reason to suggest that this vision could become reality:
What happens to pay and the income squeeze from now on? Evidence is starting to build of modestly higher pay settlements. XpertHR, the old Industrial Relations Services [IRS], reported that while median pay settlements remained at 2% in the three months to January, the median for those in the top 25% rose from 2.3% to 3%, and nearly 70% of settlements were higher than last time."