Remind me again, why are higher and cost-of-living-related pay increases a bad thing?

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21 Oct 2022

Dr Duncan Brown, Principal Associate

Follow @duncanbHR

‘I’m not saying nobody gets a pay rise. What I am saying is we need to see restraint in pay bargaining, otherwise it will get out of control’. Governor of the Bank of England Andrew Bailey, BBC Today programme, 3.2.22 (In 2021 he earned £575,538, 18 times average earnings).

Pay more?

I followed up our recent excellent IES HR Directors’ Retreat with a presentation last week to the European HR Directors’ Circle in London, linked up to Paris and Frankfurt. The discussion focused on the cost-of-living crisis and how employers should respond.

Should they pay staff more to protect their living standards? But does that drive up their own costs and risk fuelling still-higher inflation, as Mr Bailey asserts? That’s the core dilemma facing HR leaders.

The latest ONS data revealed annualised growth in total earnings up to 6.0 per cent, a twenty-year high. Yet with CPI price inflation also up at 10.1 per cent, real pay fell by a near-record 2.9 per cent. In fact, the last decade has probably been the worst for pay growth for 200 years.

‘We want more pay’

Unison’s decision to ballot its 406,000 NHS members, where 2022 pay awards average 4 per cent, is the latest in a series of disputes. Workers are demanding awards of at least the level of inflation, from employers who say they can’t afford to pay that.

According to the Director of Policy at CMI, half of employers they surveyed can’t afford to help their employees. Yet employers on both sides of the Atlantic, despite their warnings of recession, have been ‘easily’ increasing their prices, and profits, according to the Wall Street Journal’s analysis. And HR leaders at my meetings had nonetheless all made, or were planning, additional financial support for their employees to close the real wage gap.

Why higher pay isn’t driving a return to 1970s-style pay/price ‘stagflation’

Andrew Bailey said restricting wage growth was vital for ‘keeping a grip on inflation’. Otherwise, we could return to the chaotic, low productivity ‘stagflation’ of the 1970s. Yet Mr Bailey, our productivity today is actually worse.

Craft and Mills’ research found:

‘The current slowdown has resulted in productivity being 19.7 per cent below the pre-2008 trend path. This is nearly double the previous worst productivity shortfall after the downturn in the 1970s.’ 

Austerity-driven economic orthodoxy, to hold interest rates, inflation and pay increases down, has been bad for national productivity, even worse for pay. Slower growth means less money for pay awards. The IFS estimates by 2026, earnings will be £13,000 below where we might expect given pre-2008 trends.

The earnings of high-paid employees meanwhile have steamed ahead, by 39 per cent for the CEOs of FTSE 100 companies, according to the High Pay Centre. A similar trend is evident throughout Europe, with shareholder payouts rising seven-times faster than wages according to the ETUC.

How has this happened? Today is obviously not the 1970s, whatever Mr Bailey’s worries. Trade union bargaining covers only 13 per cent of private sector workers, compared to half in 1973.

In fact, wage awards have significantly lagged price escalation. XpertHR reports ‘a summer of stability in pay awards’ (if nothing else!). Average base pay increases have plateaued for five months at 4 per cent. According to Joseph Rowntree Foundation, low-income families are living through a ‘frightening year of financial fear’.

The alternative employer model: invest and pay people more

So why pay workers more?  Tesco CEO Kevin Murphy justified its out-of-cycle pay award for store staff to £10.30 per hour, stating ‘we try to ensure colleagues don’t have to go to food banks’. But he also said it’s ‘a key part of how we see the world’.  

This alternative philosophy, ‘HR-onomics’ perhaps, involves investing in people, their skills, pay and progression, paying as much as you can afford rather than as little as you can get away with.

Our work at IES highlights specific practices linked to higher productivity. These include:

• Addressing low pay, which is actually associated with higher employer costs, through increased turnover, absenteeism and lower employee commitment.
• Fair pay practices, as IES detailed for the EHRC, are associated with higher employee trust and engagement.
• Skills-based pay and progression, which as IES’s Europe-wide research project demonstrates, delivers potentially huge benefits for employers.
• Profit sharing, employee ownership and share schemes. My recent research demonstrated ‘a greater presence of collective variable pay schemes coincides with better performance, especially at site level’. The Employee Ownership Association has demonstrated a similar performance premium over quoted companies.

The shift required towards higher, cost-of-living-related pay

The remuneration of staff in the United Nations Professional categories is made up of two elements: base salary and a ‘post adjustment’, a monthly multiplier based on cost-of-living factors and exchange rates, as well as inflation.

Western governments have regularly criticised the approach. Yet few pay structures survive over 50 years. The benefits of staff stability and security are obvious at this time of high uncertainty and inflation.

Politicians as well as employers are recognising the failure of the low-pay/low-people-investment model. US President Biden openly criticised the government’s plan for the top-rate tax cut. He directly intervened to avert a national rail strike, in contrast to the rail disruption here. The new US rail agreement includes an immediate 14 per cent pay increase.

Katherine Chapman of the LWF justified the record inflation-matching 10 per cent increase in their real living wage last month for providing ‘greater security and stability’ for low-paid workers and the wider economy: ‘We know the Real Living Wage is good for employers as well as workers… it must be at the heart of solutions to tackle the cost-of-living-crisis.’

Don’t you agree, Mr Bailey?

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Any views expressed are those of the author and not necessarily those of the Institute as a whole.