h2g2 The Hitchhiker's Guide to the Galaxy: Earth Edition

I just heard a lady called Heather Wakefield (of the public sector trade union Unison) on the PM program on Radio 4. She asserted that public sector pay doesn't affect inflation.

Maybe there a few ways forward on this one:

1. First check whether the dear lady actually believes this. If she doesn't, find something to charge her with. (Incitement to violence possibly?) If she does believe it, I dunno, have her sectioned under the Mental Health Act?

2. If the previous suggestion turns out to be impractical, then have the BBC introduce all future interviews with something along the lines of: "Listeners are warned that this person has a track record of making ridiculous statements on economic matters that nobody in their right mind would credit".

3. Failing even the above, I would like the BBC to broadcast a similarly incredible claim to redress the balance. It would need to be something like: "If we disband Unison and replace all the members jobs with private sector contracts, it would be possible to substantially reduce everybody's taxes".

Come to think of it though, I actually find that last preposterous idea rather more credible than Ms Wakefield.

Perhaps we could recommend and economics course for her...

Was she alive in the 1970s when we had the last serious wage/price spiral do you think?

t.

I wonder how much Unison contributes to Labour Party funds ?

Maybe she meant public sector pay *on its own* does not drive inflation?

The Chancellor (past and present) always seems to take the line that the civil service/public sector somehow needs to 'set an example', but you don't often see him calling for restraint in city bonuses, for example...

So if Unison are paying, they're not getting a very good deal.

sprout

If it is true that 25% to 30% of the working population are employed by the public sector then how can it not affect inflation?

The woman is 'barking'

Novo

Clearly if she actually said public sector pay has no influence on inflation then it is wrong.

However it is very possible to "over egg" the effect. In truth almost all of the recent rise in inflation was driven not by inflationary pay awards, but by rising fuel and food costs.

I wouldl ike to echo the comment about city bonuses, it is not surprising that Unions get annoyed when the government claim that city greed is "good for the country", but that dedicated public sevants not wanting to become in real terms poorer at an already difficult time is somehow irresponsible.

FB

In good times:
"The wealth creators and risk-takers and innovators need to be incentivised and rewarded. The City and Banking sectors generate a lot of income for the country which trickles down to everyone. Objecting to pay rises and tax cuts for the rich is just the politics of envy." The rich get richer.

In bad times:
"The unions are just not living in the real world. Times are hard, we need to tighten their belts. Public sector workers - no matter how poorly paid - need to show restraint and accept pay rises below the rate of in order to stave off inflation." The poor get poorer.

Never the other way round. Funny, that.

On a different note, what exactly is wrong with inflation? I know hyper inflation (Zimbabwe style) leads to instability, which is bad. I know stagflation (inflation plus stagnant or negative growth) is bad. But what is it about inflation that's so bad that's led to its control becoming the central goal of economic policy?

Hi Otto

I suspect that it has something to do with the 15% interest rates that the Tories had to apply back in the dark days of the 70's, arm twisted by the World Bank so that devaluation was avoided.

I'm certainly no economist, but surely the essence is that if prices rise ,and we all pay ourselves more to insulate us from the effects, then ultimately we are trying to pretend that supply and demand are not factors affecting costs. Clearly not true, and since we are not food or fuel sufficient as a nation, it is something we cannot ignore.

Novo

It is perhaps worth remarking that I work for a small firm , and i know from the trading position that I will not get above 3% rise this year. Like most businesses we will have to cut costs where possible, and that means pressure on wages too.

So whilst I see the point that Unison and FB are making, and I also se your point about the rich getting richer, I cannot see how, in general terms, we as a nation can offset the world increase in cost for fuel and food by paying ourselves more without producing more, or being more efficient or cutting public expenditure.

Novo

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Up to a certain point, about 6%, inflation is relatively costless. There are 'menu costs' which involve businesses changing prices, but they're relatively small. Also, low, positive inflation allows the economy to evolve by allowing real incomes to fall in some industries when they become less valuable. People tend to be slightly miffed at a below-inflation pay rise (a fall in the real wage), but go absolutely apeshit if they are offered a fall in the nominal wage.

Of more concern is that inflation erodes savings and the returns on investments. To combat this, interest rates need to be high, which discourages investment, leading to slower economic growth. Also, higher inflation tends to be variable (eg 50% variation on 10% as opposed to 2% is higher) and more difficult to control.

As for becoming central to economic policy, targetting inflation works better than any other mechanism to stabilise the economy. Wage and price controls (Novo might remember them) don't work, basically. A central bank which consistently keeps inflation low, and is seen to do so, is the best we can do. If govts control interest rates, then they have a permanent incentive to allow inflation to rise, but central banks don't. Basically it's a kind of fulcrum for stability. Most other variables are kept in line if inflation is low and stable.

Thanks Pedro, that's a good explanation. I've got friends who are (academic) economists, but I knew I'd get a clearer answer via the Forum.

"So whilst I see the point that Unison and FB are making, and I also se your point about the rich getting richer, I cannot see how, in general terms, we as a nation can offset the world increase in cost for fuel and food by paying ourselves more without producing more, or being more efficient or cutting public expenditure."

It's true we can't pay ourselves more and more without there being some extra real source of that extra wealth. In my view the answer is fairly simple - we create a fairer society without such huge gaps between rich and poor. In good times, we all benefit, in bad times, we all economise.

People will always grumble, of course, and think that their particular profession or trade is undervalued or unfairly treated, but it's much harder to be taken seriously when calling for "wage restraint" for the public good when you're a fatcat businessman or politician who will be completely unaffected.

I should note that controlling inflation doesn't mean zero inflation. The government's target is a touch over 2%, and they've been there or there abouts for almost all of my memory - back to Black Wednesday or whatever it was called.

I don't understand why controlling inflation works, but it seems to be doing well for the countries that employ it.

Thanks for all the comment everyone.

I'm a bit gobsmacked by the tendency to equate the private sector with the City of London, though. Most people I know work in the private sector and they aren't remotely privileged. They tend to resent public servants who don't feel inclined to serve a lot more than they resent (or even recognise) fat-cat bosses.

We've got a position in the UK now where public sector terms and conditions are often better protected than private sector ones. Final salary pension schemes are a good example - the public sector pension burden is already untenable. Another perspective: the worst-performing private sector workers are sacked, while their public sector equivalents appear relatively untouchable. This is all in spite of the fact that the public sector doesn't create wealth. As a society we can afford only the public services we earn enough to pay for.

I don't think this is widely enough understood. The idea of militant overhead is simply bizarre in the economic real world, but the public sector sometimes seems to epitomise such a mindset. It's not just the low paid either. Look at the BMA. Are all GPs worth a hundred grand? Am I just unlucky in knowing half a dozen who manifestly aren't?

Under what circumstances should public sector workers be laid off, do you think? In the private sector, the answer very definitely includes the circumstances of a general economic downturn. Do you want real parity? What IS parity - it surely can't be equal pay AND better job security?

Of course, not everyone in the public sector is poorly paid, and not everyone in the private sector is well paid. It's just that the people preaching "wage restraint" are generally the fatcats.

Public sector jobs do tend to have better protection - against economic downturn at least - and sometimes better conditions, but for less money. There are fewer and fewer final salary schemes, and those that I'm aware of are funded by employee as well as employer contribution.

It's downright weird to think about the public sector in terms of wealth creation. In fact, that's a really odd way to look at society as a whole, as if the purpose of society were just to generate more and more and more material goods. But if people insist on looking at it that way, where would be we without teachers, universities, the emergency services, health services, government administration, street cleaners, social workers, probation officers and so on? If we must look at everything in narrow terms, all of these generate, facilitate, or protect vast amounts of resources. It's all very well saying "how can we afford x", but also ask "how can we afford not to have x."

Parts of British society has a strange, almost schizophrenic attitude to the public sector. Most of the time there's a lot of bluster about overstaffing, overpaying, a refuge for the incompetent and lazy and so on. But suddenly, when a strike is threatened, you'll hear the same critics complaining about vital services being withdrawn, the most vulnerable people being held to ransom, letting down children/patients/the public. All of a sudden, their work is vital and striking is indefensible. Funny, that.

The reason that public sector staff hit the headlines in times like this is just the numbers involved and that they have a common employer and common pay bargaining. It's the large numbers that are said to make a difference in a way that even the largest private companies do not.

But just as it's the poorly-paid public sector workers who get pay cuts when there's a national economic problem, so it's the poorly paid company employees who get pay cuts when things are going badly for the company. Public or private sector, it's all the same. The well paid benefit from the good times, the poorly paid suffer in the bad times.

The people preaching wage restraint are a) the people important enough to be paid attention to and asked by the media and, b) the people who pay the wages. In doing so, a by product is keeping inflation down. But high inflation hits the poorest most and the richest least in practical terms. Johnny Toff might have to put off buying a new yacht for a year, but Johnny Commonman can't put off buying baby milk.

Higher wages means higher costs all round. You might end up with 10% more in your pocket, but the baker saw his wage costs rise by 10% which he promptly slaps on a loaf of bread. Nobody wins really. However, in the private sector, wage increases usually go hand in hand with economising drives (in order not to slap 10% on that loaf of bread). Therefore, the private sector earns more but also produces more. This doesn't tend to happen in the Public Sector without a downgrading in service. A nursing assistant can only wipe so many backsides.

This is of course a sweeping generalisation, but it is a broad canvas after all.

Otto's absolutely right of course when he points out that essential public services are just that - essential. But how essential are traffic wardens, 5-A-Day Advisors, council press officers, deputy assistant secretaries, etc etc etc. Today I passed a guy washing down the central reservation of a dual carriageway. This involved him with the hose and a guy driving the pick-up. Immediately behind was another pick up with big warning signs & two guys in the cab. 50m behind them was another pick up with a warning sign. Again, two guys were in the cab. 50m behind them was another pick up with a warning sign. Again, two guys were in the cab. That's eight employees to wash a fence.

Some areas are overstretched, but some areas of the Public Sector are incredibly feather-bedded. My Health Centre has 4 Doctors and 10 receptionists (that I saw on duty anyway). My Dentists however has 6 dentists and 2 receptionists. The public aren't stupid.

>>It's downright weird to think about the public sector in terms of wealth creation. In fact, that's a really odd way to look at society as a whole<<.

You think so? Here are two groups of questions that I think are revealing.

1. Do you concede the idea that you can be doing the same job this year as you did last year, only now it's of less worth to society than it used to be? Do you then concede that you shouldn't be paid as much as before for doing the job?

In my experience, private sector workers accept this as a hard fact, whereas public sector workers perceive an outrageous injustice.

2. Do you think that if the paying body for your public sector job ceased to exist, you'd be able to command at least as good a salary by selling your skills in the private sector marketplace?

Any public sector employee who can't honestly and confidently answer yes to this one has IMO no right to be complaining. If you concede that you couldn't command the same pay, isn't that tantamount to an admission that your job is subsidised by taxpayers over and above what it's really worth?

I don't think we'll have the economy we need until something really radical happens. My vote would be for everyone to have a public sector work entitlement of ten years at a good wage. After that, you work privately or else drop to minimum wage.

I really disagree with the above - it seems to be to be based on two premises, both of which I think are false:

1) All public sector jobs have private sector equivalents
2) All public sector workers are essentially talented amateurs, rather than specialists

Probably, very few police could get the same wages in a private security firm - does this mean we are over subsidising police - I don't think it does.

Civil service and many other public sector jobs is specialised work - you can't just drag any private sector bod off the street, and expect to get the same result - time and time again the government has tried this, and always with disasterous results. Can you name one private sector person who has come into the public sector and done a good job?

Public sector work is based on the following contract - I will tolerate low pay, rubbish offices, idiot politician bosses and their special advisors. I will accept to specialise myself in something that is perhaps not readily marketable in the private sector, but is nevertheless essential to the public good. In return you will give me some form of job security and a pension scheme. Break this, and everyone suffers, because what the public sector does is just as essential for the good of the nation as the private sector.

sprout

So that translates as a job for life, early retirement and a guaranteed pension then?

I wonder if we did a head count of minimum wage jobs, would we find more in the public or private sectors?

Almost undoubtedly in percentage terms it would be greater in the private sector.

Novo