Will there be a wage-price spiral as Labour bows to the public sector?

Prospect Hospice provides end-of-life care for about 2,000 patients in northeast Wiltshire every year. It is hard to quantify the value of giving people the opportunity to die with dignity in monetary terms, but freeing up expensive hospital beds is a big saving for the NHS.
Like the bosses of millions of organisations in the private and charitable sectors, the hospice’s chief executive, Jeremy Lune, has been watching nervously as generous public sector pay rises are doled out by ministers in the wake of Labour sweeping to power.
“Ultimately, our staff have got to put food on the table, they’ve got to pay the rent and so on,” he said. “If colleagues in the NHS are suddenly getting 5.5 per cent more than them, the reality is it becomes very tempting to go back to work in their local hospital.”
The 5.5 per cent increase for nurses followed junior doctors being awarded a 22 per cent hike. Now GPs are poised to snaffle an 11 per cent rise. But it was Labour’s decision to hand train drivers a 15 per cent uplift that has proved most controversial so far — particularly as, within 48 hours, the very same union had called a strike over a separate dispute on the East Coast Mainline.
Analysis by The Sunday Times reveals that train drivers will now earn a basic salary averaging almost £90,000 for a four-day week. This is before having the option to make tens of thousands more in overtime pay.
With union leaders seemingly having Sir Keir Starmer’s administration over a barrel, ministers have done little to play down the prospect of yielding to new overtures in the coming weeks and months. “There is an enormous cost to not settling these disputes,” Nick Thomas-Symonds, the government’s paymaster general, said on Friday.
Businesses big and small fear public sector wage rises could set a dangerous precedent for the private sector, potentially spilling over into demands for higher pay at a time when minimum wage rules have already pushed through two years of 10 per cent rises for lower earners. Could this lead to spiralling wage inflation that, in time, delays the Bank of England cutting interest rates?
Nimisha Raja, founder and chief executive of Nim’s Fruit Crisps, which makes crisps, teas and other fruit-based products from a facility in Kent, perhaps summed up the mood best. “I’m not saying they don’t deserve it,” she said. “I just think it should be performance-related — and yes, what it may do is encourage private sector employees to say, ‘Hold on a minute, if the public sector can get non-performance-related pay rises, then why can’t we?’ That puts a little pressure on small businesses, especially where we can’t always be passing on the cost of the pay rises to our customers.”
Rupert McSheehy, co-founder of Swindon-based tech headhunter RMG Digital, is also not impressed by public sector pay rises that could cost the exchequer between £7 billion and £10 billion. “They’re not doing anything different for this extra money, and it’s taxpayers who are probably going to have to pay for this pay rise overall,” he said.
“It’s a shame that train companies and train drivers are getting rewarded, whereas small businesses seem to be ultimately penalised in the other direction.”
Alex Lovén, founder of the Wrexham-based online retailer Net World Sports, is just as frustrated. “It just means the already crazy high tax burden is being wasted on sectors that refuse to modernise — the result being entrenched inefficiency and further decay of the public sector … as well as stoking inflation.
“It will come back to bite them. Appeasement of union barons has never ended well.”
Craig Beaumont, from the Federation of Small Businesses, fears that his members will be the hardest hit — and that, just as in the hospice sector, they risk losing staff as their heads are turned. “It’s a set of massive pay deals, alongside things like public sector pensions, which are incredibly high. You look at the pressure it creates. People in small businesses are not getting 5 per cent pay rises.”
He added: “Blockbuster pay rises do have a morale impact on people … Eventually, they will start to think, ‘Maybe I can go for a nicely paid role in the public sector. I will get a big pension. I will get stable employment’.”
Perhaps unsurprisingly, senior Conservatives have been quick to criticise Labour’s apparent kowtowing to the unions. “This will have a knock-on effect right across the system — in terms of business and in terms of inflation,” said the shadow business secretary Kevin Hollinrake.
But will it? Economists are not convinced. Sanjay Raja, an economist at Deutsche Bank, said: “The public sector is only about 20 per cent of the workforce and it tends to be that public sector pay follows the private sector, not the other way round. What our corporate clients are telling us is that they’re more worried about the real living wage.”
This refers to the proposal from the government to make the national minimum wage account for the actual cost of living. There is currently a voluntary “real living wage” set by the Living Wage Foundation, but it is entirely voluntary. Currently, the obligatory national living wage is £11.44 for over-21s, while the real living wage is £12, or £13.15 in London.
Raja pointed out that the living wage had already shot up by about 10 per cent in each of the past two years. “The worry for some employers is that we could be set for another 5 per cent to 10 per cent rise next year, too. But until we know what the government’s plans are, we’re really flying blind.”
Details are expected to emerge in chancellor Rachel Reeves’s budget on October 30, and the ratesetters at the Bank of England will be watching closely. In June, some members of the Bank’s monetary policy committee justified their relative optimism on inflation by pointing out that the large increases in the minimum wage would not be repeated. An obligatory real living wage might change that view.
Yielding to the train drivers’ union Aslef is reportedly costing the exchequer £100 million. It is a hefty sum — but one that might well be worth it. Hotels, pubs and restaurants have lost more than £3.5 billion in sales because of strike action on the railways, according to UKHospitality.
“The end of the train strikes is good,” said Allen Simpson, the trade body’s deputy chief executive. “However, the cost to the taxpayer is more challenging.”
Simpson pointed out that the double-digit inflation of recent times was a product of price rises and an extremely tight labour market. Supply-side constraints, such as the outbreak of the Ukraine war, fuelled the price increases, particularly in energy bills, but the cost of living impact has now eased. The labour market, meanwhile, has settled to a degree following the shock caused by Brexit.
“We are at the point where we are reasonably resilient towards wage inflation and price inflation. We’ve all got to strap ourselves to the mast and sail through the storm,” said Simpson.
“The monetary lesson right now is to go for growth rather than worry about inflation. I am more worried about stagflation [high inflation, high unemployment and low growth] than I am about inflation.”
Mark Reynolds, chairman and chief executive of the construction company Mace, is unconvinced that pay rises in one sector will spark an exodus of workers from the other. “Public sector wage growth over the last few years has been behind the private sector,” he said. “Even these [latest pay] jumps would still leave many in the public sector, like healthcare workers, very much lower-paid than the people in construction, engineering and manufacturing.
“I kind of joke that construction is the second-best-paid industry in the country. And who’d want to be doing banking and professional services — which are the best paid.”
Does this justify train drivers nearing six-digit salaries for working four days a week? “We recognise it comes at a premium. That’s not for me to judge. We need to make sure that, quite frankly, trains run efficiently,” he said.
That might be scant consolation for smaller businesses and labour-intensive charities in the care sector. “Your average hospice is basically a payroll organisation, because hospices tend to own their buildings and they tend to be paid for by capital appeals or large gifts from big foundations,” said Toby Porter, chief executive of the trade body Hospice UK.
“Over the last two years, almost every hospice now precisely matches the NHS pay award by headline … or your staff will leave.”