The strikers are likely to win – but at what cost to the economy?

As part of our series looking at strikes, Sean O’Grady examines the economic impact of the walkouts

If we want Scandinavian-style levels of public service, they have to be paid for (Getty)

There is a perfectly respectable case for the nation’s nurses, and others, to be going on strike for higher pay and better conditions, which is that they are likely to be successful and thus it will be in their interests. Whether it will be beneficial to the nation as a whole is more debatable.

In the end it is more a matter of politics than economics; it’s about how good we want our public services to be, and how much we are prepared to pay in tax to achieve those ends. In that sense, in forcing the issue, the strikers might be doing the country more good than harm – on balance. As the old quip goes, the British tend to want high Scandinavian standards of public service provision, but with low American-style tax levels. A successful strike might shake the nation out of such complacency, and help the NHS retain the staff it needs.

Strikes, or successful ones at any rate, usually take place because of conditions in the labour market – and have surprisingly little to do with “union militancy”. It is, in other words, a matter of supply and demand. Mick Lynch, secretary general of the RMT, and the Royal College of Nursing were around a few years ago when industrial peace was the norm. They and their members didn’t suddenly wake up in 2022 like a cross between Rip van Winkle and Vladimir Ilyich Lenin and decide to go to war with capitalism. They’re getting a bit lively right now because there’s a shortage of labour and they can push their case.

Put at its simplest, if there is a large “pool” of unemployed in the economy and jobs are hard to come by – plentiful supply of workers, but weak demand for them – then strikes tend to be uncommon, and if they do occur they are more likely to fail.

That, for example, was the situation in the 1930s and 1980s, when strikes were relatively rare. The only really major exceptional dispute was in the coal mines in 1984-85. Partly politically motivated, it might have had more success if the demand for coal for the generation of electricity had remained strong; but coal was being supplanted by natural gas in power stations, and cheaper imports were replacing home-hewn coal.

So, with the help of some heavy-handed police work and vindictive anti-union laws, the strike failed. In the 1960s and 1970s, by contrast, unions were powerful because governments feared unemployment more than inflation, and were always willing in the end to pump more money into the economy if workers started to price themselves out of their jobs.

Attempts to restrain pay demands and strikes through prices and incomes policies in that era worked well for a few years before eventually collapsing in the inevitable “catch up” inflationary orgy. They’ve not been tried since 1979 – except to the extent that the government always has to have some account of pay policy in the public sector, including now.

Across the economy, workers have increased bargaining power based on their scarcity, at least for now

It is that approach, backed by the independent pay review bodies, that is really under siege. The lesson of history is that sooner or later the economics of the labour market will overwhelm even the most determined government. To prevail, as Margaret Thatcher did in the 1980s, you need mass unemployment – more than 3 million, in her case.

Now? Britain is in the strange position of “enjoying” (if that’s the right word) over-full employment, with vacancies and joblessness at levels not seen since around 1974. In addition, in the past few years many older workers have left the labour market.

This, apparently, arose through a combination of early retirement – taking advantage of the cashing-in of pension pots, long Covid and an increase in other long-term debilitating illnesses. Underlying all of that is of course Brexit, which has caused a sudden exodus of European labour, only partly made up for by migration from the rest of the world.

So employers are competing for a smaller pool of workers, and bidding up wages. Thus far it seems they have been able to pass on the increase in labour costs – 70 per cent of the economy – which converts into higher bills. Inflation has moved from your food, shipping and gas and electricity bills to the price of a night out, let’s say.

So across the economy, workers have increased bargaining power based on their scarcity, at least for now - while tax hikes and rising interest rates haven’t yet depressed the economy and produced enough redundancies to deter businesses from putting their prices and fees up. The strikers must be optimistic about their chances for success because they have to weigh up the loss of salary for days on strike against the prospective size of the pay rise and improved conditions. (Long gone are the days when strikers could claim social security benefits to keep them going – since the 1980s they can be starved into submission).

Britain is a two-speed economy. Wages in general are falling behind price rises: Broadly, though in the private sector they have lost less of their purchasing power, with about a 7 per cent increase in earnings. In the public sector things are meaner: 3 to 5 per cent is the norm.

For public sector workers, of course, even that comes after a pay freeze last year plus years of a pay rise cap of 1 per cent (2013-17) in the “austerity” years.

The upshot of all that is that public sector pay has been so badly eroded that there are severe shortages at all levels in the NHS and social care sectors – around 100,000 vacancies each. Similar pressures of shortage of labour are affecting most local authorities and state services.

The government basically cannot win. If it faces down nurses and the ambulance crews and crushes the strikes, then more NHS staff will leave for more attractive, better paid work in the private sector, and the labour shortage will grow even more acute and the services provided will suffer further – longer queues, fewer treatments.

Prices don’t go up anyway directly, because the NHS doesn’t mostly charge for things, and neither would taxes rise (a sort of indirect inflation); but the effect would be real and felt nonetheless. It would be analogous to a food manufacturer keeping the price of a pack of biscuits constant, but reducing the number of biccies in each packet. That’s still inflation at work.

In what you might call the pseudo-private sector – Royal Mail and the railways – where the operators can be private but operations are heavily regulated by the state, things are more complicated. Unfortunately, the Royal Mail is affected by falling letter volumes, offset by high parcel volumes derived from on-line shopping. It has largely lost its monopoly in the deliveries business but is faced with tough competition with forms that don’t have to honour statutory public service commitments. The Communication Workers Union probably have the toughest fight of all the major groups of strikers because their business is faced with the most radical changes.

The railways, by contrast, retain a strong monopoly, and thus unusually strong power to disrupt the lives of passengers. They also have skilful leadership. On the other hand, commuter numbers remain down on pre-pandemic levels. The RMT has been one of the few unions to have retained decisive bargaining power over the last few decades; but times are harder now.

As with the NHS, it’s really a question of what sort of public transport system the public is prepared to pay for through its fares and through its taxes. Giving the RMT a large pay rise would imply higher fares (and thus directly affecting measured inflation), and/or higher taxes to pay for the higher subsidies to keep the services running; and/or cutbacks in services and investment (“hidden” inflation).

Overall, though, the sums being talked about – even at the higher level of settlements demanded by the unions – aren’t that big in the context of the whole economy. They would be unhelpful, and possibly prompt higher pay in the private sector – but cutting real-terms public sector wages indefinitely is not sustainable – if we want decent public services. NHS and social care are particularly labour-intensive, and humans can’t be so easily replaced by automation or AI.

To use a reductio ad absurdum, if we cut all NHS wages by 50 per cent we’d be able to cut taxes and everyone in the country would have a little more money in their pockets to spend. But next time we needed a gallstone or a cataract seen to we’d be faced with a longer wait to see the consultant, and there’d be fewer nurses around to look after us. In fact though, that is exactly what’s been occurring in the NHS.

One way or another a modest uplift in pay settlements might be absorbed by those sometimes elusive “efficiency savings”. If they did put too much money into the economy and start a wage-price spiral then that would be serious – and would need the Bank of England to choke off the stimulus and bring inflation down again – and more people would lose their jobs.

There’s also always an issue of fairness with strikes, wages and inflation. The groups of workers with the strongest muscle or bargaining power – not by any means all trade unionists – are able to use that to maintain their living standards. Investment bankers always seem to do well, don’t they? But weaker groups, classically including pensioners living on fixed incomes, get badly squeezed by inflation, and become absolutely and relatively poorer in the process.

Generally, and leaving politics aside, an economist would advise that the British economy needs to be able to grow without triggering inflation. One way to do that, certainly in the short run, would be to increase the supply of labour, which involves an honest discussion about two even more heated and divisive subjects than the strikes – Brexit and immigration.