Wage Demands to “Compensate” for Inflation?

The ICTU is concerned because inflation was increasing at an annual rate of 5% in March. From RTÉ:

Workers will feel justified in seeking pay increases to compensate for these price rises, but employers and the Government will be reluctant to allow such an outcome as it would in a second round of inflation in the economy.

The European Central Bank has warned strongly about such second round inflation, and said it would raise interest rates in Europe if higher inflation results in higher wage increases.

I guess someone will need to explain this to me, but I can’t help feeling that there are some important facts which are mostly left out of this debate.

Firstly, the workers referred to in the above article are only those workers whose wages can be raised by the social partners. New figures show that nearly 70% of the workforce is not unionised. Those working in government services and healthcare is estimated at about 455,000 by the Labour Force Survey. So the majority of Ireland’s 2 million strong workforce operate in the market, where their pay is a function mostly of their productivity, and not of government negotiations.

Secondly, the very notion of being “compensated” for inflation seems to miss the point of employment. As I’ve argued before, the purpose of employment is to satisfy consumer demand, not just to provide wages for workers. The shopkeeper doesn’t say “I’m having a tough time right now, the lease has gone up and I’ve been feeling unwell recently, so you are obliged to pay me double.” That would reflect a failure to understand the nature of the activity he was engaged in.

Now the fact that the government is in the business of paying and setting people’s wages means that any sort of meaningful economic calculation in this regard is not possible. However, the general point still holds, so I think unions would make a little bit more sense if they argued for their wage demands based on the quality of the services they provided, not on the hardship that bad times inflict on their members.

Thirdly, the elephant in the room is inflation itself: what exactly it is, and where it comes from. My experience is that most people have very little understanding when it comes to this subject. Fortunately, it is neatly explained in this article which is excerpted from this book (pdf), a reading of which should prove highly illuminating for almost anyone.