Quick thread bringing cost of living, strikes, monetary policy, government public sector pay policy together...
The thing kicking this off are the shortages. First throughout supply chains, caused by how covid disrupted production and distribution; and is still disrupting production out of China as they continue with their futile 0 covid policy
And now of energy, caused by Russia's invasion of Ukraine, to which we have responded by cutting back purchases of Russian oil and gas; and of many food types, due to the loss of production from Ukraine.
These constraints mean that we are poorer. Working as hard as before, there is less energy, food and fewer goods to go around. Market forces work to translate the shortages into increases in prices.
We have some choices about how to respond, but we can't avoid the brutal fact that on average we have to get poorer.
Central banks have chosen, partly by design, but also partly by accident, to help us get poorer by allowing the shortages to translate into a general incrase in prices. They could have tightened policy a lot to keep the average price level unchanged instead.
That would have meant a much bigger recession than the one we are going to see, and generate a lot more unemployment and misery.
The slightly more benign path we have chosen is to let prices rise by more than wages [hence the link to strikes and public sector pay].
Another choice is whether although on average we have to get poorer, we borrow from the future to shield everyone from some of the difficulty [eg by cutting taxes]; or we increase taxes on the better off, or borrow to fund increases in benefits or tax cuts for the worse off.
Workers are going to have views about the need for us all to collectively get poorer; and governments are going to get drawn into that in their role as employers, via public sector pay.
If there is fierce competition and margins are thin, workers are not going to be able to do anything but take the real pay cut. If competition is weak, and firms are making excess profits out of consumers, workers might be able to wrestle a larger share of that.
It's not for individual workers or even unions to take on the national responsibility of steering us all towards being poorer. They look after their own interests.
And it may seem curious but I don't think state or quasi-state employers either should by trying to shape pay policy to any macroeconomic goals.
Public sector pay policy should flow from political choices about the quantity and quality of services that are going to be delivered [operations, lessons, train journeys], from which will follow a recruitment need.
From that follows a pay policy, chosen with a view to recruitment, motivation and retention. Labour market conditions should govern pay policy at the individual unit level; not macro [demand or inflation] policy.
Macro policy instruments are the total spending-taxes, and also the Bank of England policy rate. If you use public sector pay directly, without adjusting your service objectives, you will waste money and/or deliver poor services.
Detrmining the going rate in some labour markets is not easy esp as both the state employer and employees often have some monopoly power as buyers and sellers of the labour. But you will notice a lack of bums on seats or cv's in the post.
It is also tempting if you are a politician and you don't want to get bad headlines to use the pay bill as the thing to adjust, and not the promises about public services.
'We have decided to respond to global shortages by giving out fewer services' might seem less attractive than 'services will stay the same but we need to make savings from those lazy overpaid civil servants and hospital administrators'.
Which brings to mind - what should we do with those service promises? What should happen to public sector output?
The govt have to balance some things. First, what, in conjunction with the Bank of England's interest rate choices, generates the best path for total demand and inflation?
Second, because of the shortages that are affecting all of us, a given tax take will go less far in producing services. Or, just to keep service provision standing still, more money has to be found.
Third, part of the process of shielding those at the bottom from some of the effects of the shock might mean producing more services.
Couple more centrist Dad comments on the role of unions. They are not the best means by which the 'shield the poorest from the effect of the shortages' policy is carried out. This is best done by govt with taxes, benefits and public services.
A lot of people aren't union members, for a start. And they are anyway hemmed in by market conditions, their bargaining power constrained by labour market conditions, their firms' profits.
If they do manage to extract shielding payments, there is no way of targeting the costs at the better off: they may simply be added to prices, paid by all, rich and poor; and via pension funds even dividends to shareholders are often widely distributed.
Plus, obviously, not only are many of those in work not in unions; many are not in work at all. Unions can't help them.
Responding to another thread, this reply asks a very good question which is germaine to this one: twitter.com/croncobaurul/s…
Bailey should not have said these things IMO. It gave the impression that somehow the BoE could not determine the inflation rate; and it was moralising and tactless [given his own enormous £500k salary].
You can see that it springs [or might spring] from the observations here, that ultimately there is no way round the fact that we all have to get poorer, somehow. And that unions are not good tools for the kind of redistribution that is needed.