The past few days have had a hint of the late 1970s about them. A shortage of lorry drivers has led to fears of food shortages. Nurses are thinking about taking industrial action over pay. The Bank of England has been fretting about rising inflation.
Holed up in Chequers, the self-isolating Boris Johnson has been as unconvincing as a bronzed Jim Callaghan was on his return from Guadeloupe in January 1979, when he was misquoted as saying, “Crisis? What crisis?”.
This, though, is not a rerun of the period that helped propel Margaret Thatcher into power and ushered in 18 years of Conservative rule. It doesn’t herald the start of an era of hyperinflation, nor is it the dawn of a new golden age for workers.
The economy has changed in the past four decades and any echoes of the 70s are faint, especially in the case of the labour market, where fears of an imminent wage-price spiral are overblown. Most of the factors driving up pay are temporary; the factors that will eventually put the brake on earnings growth are structural.
The annual rate of pay growth is certainly going up, but that is mostly due to the latest figures comparing a time when the economy was opening up with a time when it was shut down. These “base effects” are amplified by the fact that most of those who have lost their jobs have been low paid. Removing them from the labour market boosts the average earnings growth for those who have remained in work during the past 16 months.
Reports of firms struggling to fill vacancies may have given the impression that the labour market is tight, but 5% of the workforce is on furlough and the number of hours worked remains 7% below its pre-crisis level. Neither of those statistics points to overheating. Rather, the picture is of many employers scrambling to find workers at the same time as restrictions have been lifted. In the short term, these labour shortages will be made worse by more than 1 million people being advised to self-isolate in the past two weeks.
It will take time before the labour market returns to where it was pre-pandemic, and even then only after a spell of higher unemployment. The reasons for that are simple: the economy’s rate of recovery is slowing at a time when the furlough is being phased out.
The evidence from the past suggests there is unlikely to be massive upward pressure on pay even when the country does return to normal. There was certainly little sign of wage inflation in the months leading up to the pandemic, when the unemployment rate was below 4% and running at levels not seen since the mid-70s.
Why was that? For a start, the pre-pandemic labour market was not as tight as it looked. As the employment experts David Blanchflower and David Bell have shown, a large number of those who were employed would have worked longer hours had they been available. It is not just unemployment that matters, but under-employment.
Moreover, there are now more part-time workers relative to full-time workers than there used to be; self-employment has boomed, as has the use of zero-hours contracts. Britain’s flexible labour market means rising employment levels have been accompanied by rising casualisation and job insecurity.
Employers have been able to tap into new sources of labour when demand has been strong. One example of this was the tendency of older workers to look for jobs that would top up their pensions. Another was the arrival in the UK of workers from former iron curtain countries following their accession to the EU in 2004. Unlike most other countries, the UK allowed immediate free movement without a transition period. As a result, the supply of labour increased.
Since the peak of 13.2 million in 1979, there has been a dramatic fall in trade union membership, which is now highly concentrated in the public sector. Most of the unionised jobs in the private sector are in companies that have long had collective bargaining agreements; in the new companies of the services they are virtually unknown. Unions are far less powerful than they were four decades ago; the balance of power in the workplace has shifted in favour of employers through a combination of mass unemployment, curbs on trade unions and welfare reforms designed to ensure that people take low-paid jobs.
Make no mistake: a swing of the pendulum back in the other direction would have beneficial consequences. Higher wages would boost aggregate demand and provide incentives for employers to invest more in new equipment and training in order to get more out of their workers. Productivity would rise.
In most respects, the labour market will come out of the pandemic pretty much unchanged. There are, though, tentative signs that the bargaining power of workers has increased modestly, although the fog of the pandemic makes it hard to know for sure. Employers in certain sectors have been saying that the return to their home countries of some foreign workers as a result of Brexit and Covid has left them short of staff, obliging them to pay higher wages.
It may seem a bit curious given that employers are complaining about the impact of a diminishing supply of workers from overseas, because they have always insisted the arrival of employees from eastern Europe had little or no impact on UK wage growth. Either the supply of labour affects pay or it doesn’t. They can’t have it both ways.
But if low-paid workers are getting a marginally better deal, that’s to be welcomed because more than half the people living in poverty in the UK are in work. Flexibility comes at a cost.
