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Don’t be fooled: the UK economy is not seeing the 1970s repeat | Larry Elliott

The last few days had a hint of the late 1970s. A shortage of truck drivers has raised fears of food shortages. Nurses are considering taking industrial action over salary. The Bank of England is concerned about rising inflation.

Hiding in Checkers, self-isolating Boris Johnson was as unconvincing as a tanned Jim Callaghan when he returned from Guadeloupe in January 1979 when he was misquoted as saying, “Crisis? What crisis? “.

However, this is not a repeat of the period that brought Margaret Thatcher to power and ushered in 18 years of conservative rule. It is neither the beginning of an era of hyperinflation nor the beginning of a new golden age for workers.

The economy has changed over the past four decades and all echoes of the 1970s are weak, especially in the labor market, where fears of an impending wage-price spiral are exaggerated. Most of the factors driving wages up are temporary; the factors that will ultimately hold back earnings growth are structural.

The annual rate of wage growth is certainly increasing, but this is largely due to the latest figures, which compare a time when the economy is opening to a time when the economy is closing. These “base effects” are compounded by the fact that most of those who have lost their jobs have been poorly paid. Their exit from the labor market increases the average income growth of those who have remained employed in the past 16 months.

Reports of companies struggling to fill vacancies may have created the impression that the labor market is tight, but 5% of the workforce is on vacation and the number of hours worked is 7% below pre-crisis levels. None of these statistics indicate overheating. Rather, the picture shows many employers trying to find workers while restrictions have been lifted at the same time. In the short term, this labor shortage is exacerbated by the fact that more than 1 million people have been advised to self-isolate in the past two weeks.

It will take time for the labor market to return to pre-pandemic levels, and even then after a period of higher unemployment. The reasons for this are simple: the economic recovery slows down at a time when vacation is about to run out.

Past evidence suggests that there is unlikely to be massive upward pressure on wages even if the country returns to normal. In the months leading up to the pandemic, when the unemployment rate was below 4% and at levels not seen since the mid-1970s, there was certainly little evidence of wage inflation.

Why was that At first, the labor market wasn’t as tight as it looked before the pandemic. As employment experts David Blanchflower and David Bell have shown, many of the workers would have worked longer if they had been available. It’s not just unemployment that counts, but underemployment.

In addition, there are now more part-time workers compared to full-time workers than there used to be; Self-employment is booming, as is the use of zero-hour contracts. Britain’s flexible labor market means that rising employment levels have been accompanied by increased casual work and job insecurity.

When there was strong demand, employers were able to develop new sources of labor. An example of this was the tendency of older workers to look for jobs that would add to their retirement benefits. Another was the arrival of workers from former Iron Curtain countries in the UK after joining the EU in 2004. Unlike most other countries, the UK allowed immediate freedom of movement with no transition period. This increased the labor supply.

There has been a dramatic decline in union membership since the high of 13.2 million in 1979, which is now heavily concentrated in the public sector. Most unionized jobs in the private sector are in companies that have long-term collective agreements; they are practically unknown in the new service societies. Unions are far less powerful than they were four decades ago; The balance of power in the workplace has shifted in favor of employers through a combination of mass unemployment, containment of unions and social reforms to ensure that people take low-paying jobs.

Make no mistake about it: swinging the pendulum back in the other direction would have beneficial consequences. Higher wages would drive aggregate demand and provide incentives for employers to invest more in new equipment and training to get more out of their workers. Productivity would increase.

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The labor market will survive the pandemic largely unchanged. However, there is preliminary evidence that workers’ bargaining power has increased modestly, although the fog of the pandemic makes it hard to say for sure. Employers in certain sectors say the return of some foreign workers to their home countries as a result of Brexit and Covid has created staff shortages that oblige them to pay higher wages.

It might seem a little strange considering employers are complaining about the impact of a falling supply of overseas labor because they have always insisted that the arrival of workers from Eastern Europe has little or no impact on UK wage growth had. Either the job offer affects pay or it doesn’t. You can’t have both.

But if the low-wage earner gets a marginally better deal, that is to be welcomed, as more than half of the UK’s poor are employed. Flexibility has its price.

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