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Public sector wage negotiations and second round effects

UK
  • The BBC has reported that the government could make an announcement as soon as today on whether it will accept the independent pay reviews' recommendations that wages should rise by up to 6.5% for public sector workers.
  • We wrote about this a little in the Gilt Week Ahead, noting the political conundrum of the government accepting higher wages which could be inflationary or not accepting the recommendations which would almost inevitably lead to more strikes.
  • However, something else to consider is that there is a potentially inflationary element to both outcomes here: as noted, the obvious route is higher wages lead to higher disposable income and set a precedent for future wage negotiation rounds - which could have second round effects.
  • But the less obvious route is that if there are more strikes in the NHS, the waiting list will become even longer. One of the things that has been puzzling about the UK labour market relative to other developed countries in the aftermath of the pandemic is how much higher the number of those inactive due to long-term sickness are in the UK relative to elsewhere. Part of this can probably be attributed to the inability of the NHS to work through its waiting lists, which are instead still increasing.
  • The longer someone has to wait for a routine operation, the more likely their health is to deteriorate into a place where they exit the workforce (at least temporarily). And that contributes to reducing the pool of available workers, leaving the labour force tighter than it otherwise would be and hence can lead to more wage rises with the knock on second round effects.
  • We are not suggesting that the latter has a larger inflationary impact than outright higher wages in the public sector, but there is still an inflationary impact of higher NHS waiting lists - and it's largely going under the radar here.
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