INCOMES POLICY

ROBERT CARR, M.P.

THE consistency with which both major parties in opposition have condemned incomes policies, particularly statutory ones, is matched only by the consistency with which they have been driven to make use of them when in office.

Support for free collective bargaining has long been an article of political faith corninanding bi-partisan allegiance to which the writer in the past willingly subscribed. It is one of those institutions in the development of which we feel with pride that Britain led the world. And indeed we did. For a long time our pride was justified because free trade unionism with collective bargaining as its outward and visible symbol was a civilising force, making a contribution almost as essential as that of Parliament itself, to the freedom and protection of the majority of people living and working in an industrialised society. But like some other great British institutions and traditions, it has begun to creak badly in the post-war world. The more closely and dispassionately one looks at British-style free collective bargain- ing the more difficult it becomes to justify it as an acceptable means of determining incomes in present conditions without some external supervision and control.

In theory, it seems almost indefensible whether looked at from the Left or the Right of the political spectrum. Viewed from the Left, it is wholly irrational, as well as impracticable, to wish to plan everything except the level of pay and the pay relativities between one occupation and another. To leave levels of pay unplanned in an otherwise planned economy would at least make the direction of labour inescapable even if it did not destroy the plan altogether. It is hypocritical of left-wing socialists to say they will be prepared to consider the planning of incomes once everything else has been socialised, because the latter cannot be achieved without the former. On the other hand, when viewed from the Right, collective bargain- ing as we know it is wholly inconsistent with the principles of a free market economy. In areas where trade unions are strong, which means all the key areas of the economy, there is no free labour market in the true sense of the term because of the monopoly power which the unions command and are nowadays only too ready to use. Where

* The author is Member of Parliament for Carshalton.

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ROBERT CARR, M.P.

free competition is destroyed or seriously distorted by monopoly power, the theory of the market economy demands that the mono- poly should be broken up or, if that is impracticable, that it should be supervised and controlled. Unless or until market economists advocate the abolition of trade unions at least in their present wage bargaining role, they should be driven in principle to accept an interventionist incomes policy of one kind or another.

The Pattern of Differentials Turning from theory to practice, it is only too evident that Eritish- style free collective bargaining has failed either to keep the annual rate of wage increases within levels consistent with a reasonable degree of price stability or to roduce any significant improvement, in income terms, in standar K s of fairness and social justice. The pattern of differentials has changed very little. The low paid are still the low paid. Any real progress in their relative position has generally resulted not from free collective bargaining but from long- standing statutory machinery, such as the Wages Councils or the periodic interventions of statutory incomes policy. (Stage 2 of the Conservative Government’s policy and the L6 flat increase being

sed by the present Labour Government are fair examples.) Free

matic checks and balances of the market have largely disappeared, and in which the strength of a particular group’s monopoly bargain- ing power is the dominant factor. Maintaining differentials and the leap-frogging claims associated with them are the hall-marks of our wage bargaining system. All this makes neither economic nor social sense.

Perhaps then it is not surprising that successive governments, both Labour and Conservative, have felt driven by the force of events to intervene in order to influence the results of collective bargaining. Over a period of what is now almost 30 years, we have had the pay pauses associated with the names of Sir Stafford Cripps and Mr. Selwyn Lloyd, followed by Lord George Brown’s Declaration of Intent, the Labour Government’s statutory policy from 1966 to 1969, the Conservative Government’s statutory policy from November 1972, and now once again the resent Labour Government’s imposi-

to support or implement these various prices and incomes policies, both voluntary and statutory, successive pieces of machinery have been instituted, starting with the Three Wise Men and going on from there to the National Incomes Commission, the Prices and

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col impo ective bargaining has become a free-for-all in which the auto-

tion of a maximum increase o P E6 a week across the board. In order

INCOMES POLICY

Incomes Board, the Pay Board and the Prices Commission, the last of which still survives in active life.

The critics from Left and Right would of course say that all these initiatives have failed, and even perhaps that they were doomed to fail from the beginning. It may be that some members of both the Labour and Conservative Cabinets which struggled to imple- ment these policies would, in moments of particular frustration and difficulty, have agreed with these critics. Yet the fact remains that next time round these same Cabinet Ministers have been driven, against all their wishes and good intentions, to make another attempt. We have repeatedly found by bitter experience that without an incomes licy free collective bargaining, as currently practised in Britain, cads to results which are impossible to live with. Because of our levels of inflation, production costs in this country are making us uncompetitive. It may be true that we have not yet learned how to manage an incomes policy successfully; but it is even more certain that we have not yet learned how to live without one.

Are Incomes Policies Doomed to Failure? Given this predicament it is important to see whether the allegations of failure, so loudly proclaimed by the critics, are in fact as justified as they would have us believe. Of course incomes policies have failed when measured against the targets set for them when they were introduced. But how much worse might things have been without them? To form a proper judgment it is necessary on each occasion to look at the trend of cost inflation which immediately preceded their introduction and to measure the extent to which they changed this trend.

Take the case of the statutory counter-inflation policy introduced by the Conservative Government in the autumn of 1972-perhaps the most loudly condemned of them all. The facts now available are summarised in the accompanying Tables, showing how intem- perate and wrong much of the criticism has been.

Table 1 shows the various inputs which contributed to the rise in final output prices for various periods between the middle of 1970 and the end of the first uarter of 1975. The periods have been

incomes policy or the lack of it. It will be seen at once how the part played by employment incomes in causing output prices to rise increased between the end of 1971 and the third Quarter of 1972 (following the miners’ first breakthrough); how it was reduced by

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chosen to coincide as close 9 y as possible with the various phases of

ROBERT CARR, M.P.

TABLE 1 Contributions to rise in fina2 output prices

% per annum contribution from: 1970 Q2

1971 Q4 * to

Employment income 3.42

Kent and self-employment income 1.09

Gross trading profits of companies 1.14

Gross trading surpluses,

Indirect taxes less subsidies 0.01 Residual error 1 -90

Imports 0.08

public corporations - 0.01

1971 Q4

1972 Q3 5.07 1 -26

to

2.46

0

0.60

- 2.35 0.07

1972 Q3

1973 Q4 4.03 6-76

to

1.68

- 0.61

0.08 - 0.26 - 0.43

1973 Q4

1975 Q1 13.88 4.84

to

0.82

- 0.10

0.01 - 0.90

2.99

Final output prices 7.63 7.11 11.25 21.54

*; Q=quarter of year. Source : National income and expenditure statistics.

the successive phases of the Conservative Government’s statutory policy, and how it then increased again more than threefold when

icy was scrapped by the new Labour Government. Table I this also r1 rings out the extent to which, during the period of the Con- servative policy, import prices contributed substantially more than incomes to the rise in output prices, whereas since then the position has been dramatically reversed with wage rises contributing almost three times as much as imports.

Tables 2 and 3 compare the British record with that of six other major industrial countries. Table 2 shows the comparison in terms of consumer price inflation and Table 3 in terms of unit labour costs. Whichever measure is taken it will be seen that the only time auring the 5-year period when Britain’s performance compared favourably with that of the other countries was while the Conserva- tive Government’s counter-inflationary policy was in operation. Both before it was introduced and after it was abolished Britain was bottom-or in one case next to bottom-of the league table, with performances far worse than the average of the seven countries taken together. In contrast, during the middle period in each Table Britain’s performance was by each measure slightly better than the average. How much stronger our economic psition would be today if that performance had been maintained !

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INCOMES POLICY

TABLE 2

Consumer price inflation in seven major countries

% per annum increase in prices during: June 1970

Nov. 1972 to

U.S.A. + 9 Canada + 10 Japan + 13% W. Germany + 14 Italy + 14 France + 15 Britain + 21

Nov. 1972

Mar. 1974 + 13 + 13 + 31

+ 21 + 14 + 16

to

+ 9%

U to May '1975

+ 10 + 14 +6 + 19%

+ 12 + 25

+ 9%

Average + 14 + 17 +13$ Source : OECD.

TABLE 3

Percentage change at annual rates in unit labour costs

1970

1972 Q3 to

U.S.A. + 4 Japan + 17

France + 7 Italy + 13 Canada + 8 Britain + 19

W. Germany + 10

1972 Q3

1973 Q4 + 8 + 9 + 1 + 14

+ 25 + 7 + 10

to 1973 C 1974 C

+7 + 37 + 17 f 24 + 17 + 15 + 28

to

Average + 11 + 10% + 21

Source : Nutionul Institute Review.

These international comparisons make it clear that the Labou Government's belated return to an incomes licy was an absolutc and unavoidable necessity. The question is g w far any beneficia impact of the new licy over the coming year can be consolidatec more successfully t K" an has been the case with previous incomes policies; and how it can be carried through into a lasting improve- ment in the relative competitive power of the British economy.

Six Lessons There are at least six important lessons to be learned from previous experience. The first is a political lesson. An incomes policy can

407

ROBERT CARR, M.P.

only be carried through to success if sufficient public support can be maintained, and this must start in Parliament. If the Opposition of the day set out to undermine it and to foment action to break it, the policy will inevitably collapse.

Second is the need for maximum simplicity. If one sets out to control too much in too much detail, one will almost certainly end by controlling nothing. Except in conditions of excessive overall demand in the economy when wage drift becomes an important factor, the trend is settled by a relatively small number of major national settlements, particularly in the public sector. As soon as one moves out of the initial period of freeze or flat-rate increase, it is on these major settlements, each one involving tens of thousands of wage-earners, that the control should be concentrated.

Third, the prices policy which is an inevitable quid pro quo for the acceptance of an incomes policy must also be more simple than in the past. It should concentrate on profit margins rather than on the administrative control of thousands of individual price decisions, and the permitted profit margins in each sector must be large enough to encourage an adequate flow of new investment in the more efficient companies. Otherwise the combination of rigidity and in- adequate profitability will lead to stagnation and a further loss of competitive power relative to other countries.

The fourth lesson from the past is the need to make clear from the start that an incomes policy is to last for an indefinite period so that its control can be relaxed in gradual stages. A fixed period with a terminal date known well in advance creates an uncontrollable pressure of expectations and the probability of a flood of suddenly unrestrained claims. A similar danger arises if the criteria adopted for permissible increases cause a serious distortion of traditional differentials. This is the great risk involved in the present policy of a fixed maximum increase of 26 a week for everybody. The Govern- ment may well live to regret that they did not go €or a combination of a smaller fixed amount plus a percentage as in Stage 2 of the Conservative Government’s policy.

Fifth, and perhaps most important of all, is the need to use incomes policy to tackle the problem caused by the everlasting succession of competing and leapfrogging wage claims. Workers in one group seek to improve their position on the pay ladder only to be followed by the groups who negotiate later being even more determined to restore their relative positions. One union tries to enhance its reputation by showing that it can get more for its mem- bers than another and this competition is obviously greater if the

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INCOMES POLICY

different unions have members working in the same industry or in similar occupations. These sorts of pressure seem much stronger in Britain than in other countries, partly no doubt because of the large number of unions we have and because it is so common in Britain to have a multiplicity of unions in the same industry. One way to tackle this problem would be to use the pressures of an incomes policy to bring about a reform in our collective bargaining system, so that the largest national wage negotiations all have to be con- cluded on a single date and implemented simultaneously on a second fixed date two or three months later. Some European countries work on something like these lines with apparent satisfaction to their trade unions. The main opportunity for leapfrogging claims would be removed, as would the fears of workers who at present settle early in the annual pay-round that those who settle later in the year will steal a march on them. It would also give the Government an oppor- tunity to manage its fiscal policies with a far better knowledge of the likely input from employment incomes in the budgetary year ahead.

Perhaps the sixth main lesson to be learned from past experience is the need to have some nationally recognised machinery for dealing with special cases. Had the Relativities Board been established much earlier in the life of the Conservative Government’s incomes policy there would have been a much better chance of dealing successfully with the miners’ challenge. Some scientifically based and generally accepted system of national job evaluation is at present no more than a pipe-dream. But powerful claims to be treated as a special case are bound to arise and some at least will attract strong and widespread sympathy. Beyond a short initial period it will only be possible to allay genuine grievances and to sustain the degree of public support necessary to maintain an on-going incomes policy, if there is machinery to adjudicate publicly on such claims and if the policy itself has enough flexibility to allow these judgments to be imple- mented. Too much rigidity inevitably leads to fracture. Again, to seek to achieve too much can easily end in achieving nothing.

In conclusion, there is one important general point which needs to be made. The case put forward here in support of incomes policy is not that it is, in itself, an effective policy to cure inflation. The claim is not that incomes policy is a substitute for proper fiscal and monetary policies, but that in present conditions in Britain it is an essential reinforcement for these policies. If, in future, British trade unions can restructure themselves in a way more appropriate to modern industrial conditions; if we can extend to a much larger

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ROBERT CARR. M.P.

number of employees a genuine and understanding involvement in our industrial and commercial enterprises; if wa can provide greater stability and incentives to management and the providers of capital; and if, as a result, we can achieve in Britain a more dynamic rate of growth and a level of productivity to match other major industrial countries, then the need for an interventionist incomes policy may well decline and, hopefully, wither away. But until we have achieved these things we live in a fool’s paradise if we imagine we can do without it.

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