Pay Deals Threaten Inflation Targets
23 06 2008
Thanks to rising inflation, many private sector companies are being forced to settle pay deals at levels that threaten the government’s inflation targets, because of clauses in long-term pay deals.
Only last week Shell tanker drivers agreed to a 14 percent two-year settlement with managers, which has prompted fears this would set a precedent for other workers and calls for restraint from ministers.
Research group IDS Pay Databank’s analysis shows many other companies which previously negotiated two or three-year pay deals – at a time when inflation was expected to stay low for years – are having to give their workers a wage “kicker”.
This is because a large portion of such deals are linked to the Retail Price Index, which has risen sharply in recent months to 4.3 percent.
Such agreements are set to undermine the Alistair Darling’s pleading. Speaking to the BBC on Sunday, the chancellor said that “Pay awards in both the public and private sectors have got to be consistent with our inflation target of 2 per cent.”
Mr Darling and John Hutton, the business secretary, argued last week that the tanker driver’s settlement was a one off. However, other recent deals include Drax Power, who agreed a 7 percent pay rise for 60 workers, forming the second of a two-year deal. Babcock Engineering recently agreed a 7.6 percent increase with 50 workers.
Barclays Bank has implemented a 5 percent pay increase for 55,000 workers, as the first stage of a three-year RPI-linked deal.
These deals are much higher than the 3.3 percent Consumer Price Index measure of inflation. The government has tried to keep public sector deals at about 2 percent.
David Frost, president of the British Chambers of Commerce, described the trend as a self-fulfilling scenario which would fuel inflation further.
IDS has indicated the highest pay awards in three months to April – the last month for which accurate figures exist – were made to companies in energy and water, chemicals and engineering. One in five deals over 4 percent were lined to RPI.
Lois Wiggins, a researcher at IDS said: “The main reason they are now settling so high is because many are part of long-term deals, which means that in the second or third stage of these deals RPI is being used to work out the settlement.”
The most recent report by the research group, which showed wage inflation of 3.8 percent, suggested employers had been “wrong-footed” by predictions inflation would remain subdued.
This will add further pressure on the government as it seeks to keep a hold on wage inflation. Several unions have openly defied this policy in recent days, with Unison threatening to re-open a key NHS agreement for 500,000 employees.












