The Economics of the Pay Pause
By NICHOLAS DAVENPORT
THE letter which Mr. Selwyn S Lloyd wrote to the general - secretary of the TUC last F • First, the economic facts. Fhe TUC argue that unless the restrictive measures of July are quickly modified there will be a serious decline in trade next year. Mr. Lloyd denies such a possibility. He expects fixed investment to be maintained next year. He has admitted that it may turn downwards in manufacturing industry. but elsewhere in the private sector it will stay high, while in the public sector the present pro- grammes imply a rise of about 5 per cent. His analysis of the situation suggests that there will be nothing more than a moderate slackening of pressure in home demand, which he regards as necessary to create the conditions for a sub- stantial growth of exports. And in a .speech on November 15 at the National Union of Manu- facturers' lunch he said that world conditions were favourable to a further growth of exports, not only to the booming American and Euro- pean markets, but to the primary producers as well! In the economic debate in the House' of Commons on November 7 he had even claimed that 'in the early part of next year there will be strong expansionary forces at work again.'
It would be interesting to know who on earth is giving Mr. Lloyd such extraordinary advice. We all hope that exports will improve on their disappointing performance this year, but the European boom shows signs of turning down and the US will do its utmost not to increase its current deficit by taking more of our goods, but to enlarge our deficit by selling more goods to us. As for the primary producers, I cannot see how they can greatly increase their imports from us, seeing that commodity prices have reached a new record low level. 1 can only imagine that Mr. Lloyd has been receiving con- flicting advice and has drawn wrong conclusions from it.
The latest figures of production and employ- ment, do not support the Chancellor's optimism. The seasonally, adjusted index for production .turned downwards in the- three months ending September—from 127 to 123 -for the • manufac- turing industries and from 125 to 122 for 'all industries.' Unemployment had risen (more than seasOnally) to 387,339, or 1.7 per cent. of the working population, by mid-November and vacancies in industry had fallen to 262,915. There is no sign here of inflationary pressures. Indeed, if these trends continue the TUC may be more correct in their economic diagnosis than Mr. Lloyd. The Chancellor does not ap- pear to realise the risks he is running by keeping his restrictive measures in force too long. If exports do not increase next year as much as he is expecting, if fixed investment turns down because of his excessively dear money, a trade recession k1 ill be upon us: In fact, as soon as fixed investment fails to use up all the savings which Mr. Lloyd is forcing out of the public through his budget surplus and his 7 per cent.. money rates, industrial profits will disappear. Only an ass could tell Mr. Lloyd that he will improve our competitiveness in foreign markets by creating an industrial slump at home.
As for a national wages policy (long ago ad- vocated in this column), everyone will agree with Mr. Lloyd—even a trade union leader when he is off the platform—that it is a bad and inflationary thing for the increase in wages and salaries to go on exceeding the rate of growth of productivity. But before the trade unions can persuade their members to agree to a wages pause they will have to be convinced, first,, that they are not being unfairly singled out for attack, and, second, that the facts do support the Chan- cellor's contention that their wages have risen ahead of productivity and are endangering our
competitiveness in the export markets. As re- gards the first, it is difficult to reassure the workers when there is no evidence that com- panies in the commercial world have stopped giving their annual salary increments. In the ten years to 1960 the amount of money paid to salaries has actually risen by close on 120 per cent., while that spent on wages has risen by 87 per cent. Dividends lately have certainly been restrained (by natural causes chiefly), but what about rents? What about fees for services? What about interest paid to money-lenders? These are all rising steadily.
As regards the second point, it is difficult to convince the man working in a factory making good profits that he has not contributed some- thing to the raising of productivity. There are virtually no statistics in existence which can bring home to workers the productivity of their labour in different industries. And how is pro- ductivity on the railways, buses and other public services to be measured? We all know that the national productivity figures quoted by Mr. Lloyd are only arrived at by dividing the national product by the numbers of the work- ing population. It is not a very reliable measure —certainly when it is used for comparison with labour productivity in other countries. What is significant is that labour costs in Europe have lately been rising faster than in the UK. In Germany this year the rise in wages has far ex- ceeded the apparent rise in productivity. When European labour costs (wages and social charges) were compared in 1959 by the French National Institute of Statistics it was found that the British were not out of line with the German and only slightly higher than in France and Belgium.
This brings up the weak point in the eco- nomics of the pay pause. If the Government pulls down the national industrial output bY its restrictive measures it will reduce the pro- ductivity of labour. It is only when demand is high and the industrial capacity of the country is fully utilised that the productivity of labour will rise appreciably. But a full utilisation of capacity usually means a balance of payments deficit. These are the horns of the dilemma on which Chancellors usually impale themselves. One way out is devaluation—an unsatisfactory way, because it does not remove industrial in- efficiencies. Another is import restrictions and quotas—which we may come to. A better way out is to win the co-operation of labour in a national wages policy—through participation in the plan- ning body proposed by Mr. Lloyd.
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