Wrestling with our squeeze fatigue

Published on Wages & Income

Public sector pay is back on the front pages. Increasing it is Boris Johnson’s new big thing. Michael Gove is with him 100 per cent. The Brexit Britain boy band is back together and rather surprisingly singing from a trade union leader’s hymn sheet.

In some ways this surge of political focus on rewards for public servants might be confusing – after all public sector pay directly affects far fewer people these days. The proportion of workers found in the public sector is at its lowest level this century at just 16.4%, down from almost 1 in 5 pre-crisis.

The secret to understanding this sudden conversion of government ministers to the cause of raising the pay packets of teachers and nurses is recognising that it’s a form of virtue signalling that combines the two big squeezes the election has taught everyone matter to the public (not just the public sector) but which the government doesn’t know how to address directly: the living standards squeeze from shrinking pay packets and the spending squeeze from post-crisis austerity.

Now we all get tired when things go on too long. It’s why we walk out when a dull match, probably involving Stoke, heads towards the final whistle with no hope of a goal. Or why Swedish films have lost their 1970s and 80s chic.

The simple length of time over which these two squeezes have endured explains a lot of why the public have grown tired of them. The fact that both are far from straightforward to solve substantially explains why public sector pay has become a proxy for wider action.

First, austerity. The squeeze on public spending triggered by the financial crisis of 2008 is unprecedented in post-war Britain. On current projections by the early 2020s real public spending will be stuck at broadly the same level it was back in 2010. That’s despite our economy being bigger, an ageing population and big pressures on spending in the likes of healthcare and housing.

Ending austerity (which for the public basically means ending spending cuts) is expensive and involves either borrowing or taxing more. The Chancellor doesn’t want to do the former, and the government can’t easily muster votes for the later. That’s why the talk of raising public sector pay is combined with wishful thinking by both Michael Gove and Boris Johnson saying it be done “without causing fiscal pressures”. Good luck with that.

Second, living standards. The squeeze on family incomes makes the squeeze on public spending look like the new kid on the block. It actually started to bite long before spending reductions got going post-2010.

Falling pay is the symbol of the living standards squeeze and it’s back, for the public and private sector alike. This is happening only a few years after the post-crisis pay squeeze ended. In some areas of Britain are still earning ten per cent less than they were when the Northern Rock bank run hit the headlines.

If we weren’t tired of this squeeze there would be something wrong with us. But it doesn’t follow that it’s easy to solve, with long term reforms to maintain full employment and boost productivity being desirable, difficult, and long term. So politicians understandably focus on the parts of pay they can control. For George Osborne that meant (rightly) raising the minimum wage while for this government it means (rightly) uncapping public sector pay. Both policies are welcome but neither will raise wages for typical workers in British firms.

For all the headlines this week, the truth is that the public sector pay cap was dead as soon the exit poll came out on June 8th. The real question is not if the cap is lifted, but by how much and how it’s paid for. Even then ministers shouldn’t think that the job is done because it is just the start for a government trying to wrestle with our squeeze fatigue – after all both the spending and living standard squeezes are forecast to be with us for years to come.