Bad news for Mervyn King and George Osborne – wages are rising

I had thought that it would be relatively easy for most government departments to deal with the various spending caps brought in by austerity. Why? Because, what with the surge in public sector pay over the last decade, the main inflation in most departments has long been wage inflation. Cut that – as I rather thought they would – and job done.

Silly me. Turns out the public sector has no intention of letting wages be. So they are still rising. According to the Vocalink Take Home Pay Indices, take-home pay in the private sector was up a measly 0.6% in the three months to January. But in the public sector it rose 1.3%.

That might not sound like much, but it does make a difference. One of the many imbalances that has arisen over the last decade has been between public sector and private sector pay: if you read my last blog on the subject you will see that the average public sector worker currently takes home markedly more than the average private sector worker. This needs to be fixed. It makes no sense that the job-creating private sector should be taking more of a hit on the wage front than the job-preserving public sector. Particularly when the latter is already paid more than the former.

However these net pay numbers and imbalances aren’t the only ones the authorities should be watching. George Osborne and Mervyn King might like to also note last week’s news out from Incomes Data Services showing that, while pay settlements overall aren’t something to worry about too much yet, there are some signs about that skilled workers in the private sector have no intention of being fobbed off with falling real wages for much longer.

According to this data, the median settlement in the manufacturing sector in the last three months of last year was around 2.9%. However the average disguises the fact that some 38% of the deals struck were for pay rises of 4% or more. With Retail Price Index inflation at 4.8%, this hardly counts as a breakout of a wage-price inflation spiral. But with commodity prices still rising and standards of living very obviously slipping it could turn into one.

After all, as IDS puts it: “With increased media focus on inflation and pay, employees are more aware than ever of the gap between pay settlement levels and RPI, and are likely to put pressure on union negotiators to make up some of this ground in pay negotiations.”