Incomes Policy and the Pay Board

When the Conservatives, led by Edward Heath, entered office in 1970, Robinson’s central role in Whitehall seemed over, at least until and if Labour regained power. With the exception of accepting the need to enforce the equal pay legislation, Heath explicitly set his face against interference in the private sector wage determination process and specifically against the incomes poli­cies that had been such a prominent feature of Labour’s period of office between 1964 and 1970.

Robinson’s expertise was derived in large part from his time working as a senior economic adviser for the National Board for Prices and Incomes under the previous Labour government. It was established in 1965. This was not the first venture into something that might be called an incomes policy.

In the short life of the Pay Board, Robinson became a nationally known figure. Ironically, given his background, the coal miners are central to the story. Coal mining was a nationalised industry. A miners' strike in 1972 caused wholesale disruption to the UK economy to the extent that, in order to cope with limited energy supplies, a three-day working week had to be instituted. So powerful were the miners that the government essentially caved in and yielded to almost all of their demands. Effectively, it was the miners who smashed the N-1 policy, ultimately leading the government to move to a statutory, second phase policy, in April of the following year. This second phase, which attempted to impose a limit on pay increases of £1 plus 4% per week, was superseded by a slightly more generous third phase, with a limit of 7% or £2.25, whichever was the larger.

The new Labour government accepted the findings of Robinson's report, abolished the Pay Board and, with it, Robinson's Whitehall job. In the sum­mer of 1974, Labour launched its own brand of incomes policy. This was initially voluntary, but this was found to be insufficient and so resort was had to statutory measures. Many commentators have argued that, just as with Heath, it was its failed incomes policies that were, in large part, responsible for Labour's election defeat in 1979. With the arrival of Margaret Thatcher in Downing Street, incomes policies were assigned to the dustbin of history. Shortly after the demise of the Pay Board, Robinson was appointed Chair of the Social Science Research Council (the precursor of the Economic and Social Research Council), holding the post from 1975 to 1979.

Today's graduate students in economics have hardly heard the term incomes policy and yet in the 1960s and 1970s it was a central tool in the management of the economy. Why were economists like Robinson so wedded to this now discredited policy tool? In the 1960s, the Phillips curve had become regarded as a menu for policy choice, as Albert Rees put it. In making policy interven­tions, governments could choose to trade off unemployment and inflation. Though unemployment in the first half of the 1960s was relatively low in Britain, ministers and civil servants were children of the Great Depression and put huge weight on keeping it low. This was true even for those of them who accepted the synthesis provided by Samuelson (1955). Samuelson essentially argued that in the longer run, the classical model worked to produce full employment via flexible wages and prices but in the short run the economy was Keynesian. Naturally, policy emphasised the short run and was still biased towards keeping unemployment low.

Friedman's famous 1968 article on the expectations-augmented Phillips curve did not really change this bias amongst most policy makers and cer­tainly not for Robinson. By the late 1960s and into the 1970s, they were witnessing a period of rising inflation and unemployment. Increasingly, ele­ments of the economics profession were influenced by the implications that Friedman drew from the expectations-augmented Phillips curve. The long- run Phillips curve was vertical at the natural rate of unemployment. Any sin­gle short-run Phillips curve is drawn for a given level of price expectations. A government that attempts to run the economy below the natural rate will cause money wages and prices to rise, thus shifting the Phillips curve out­wards, reflecting a new higher level of price expectations.

However, whilst rejecting Friedman's approach, Robinson worried that injections of demand could be dissipated in inflation. Cost-push inflation dominated his thinking, as it did of many others at the time. The two main drivers were import prices and wages. The oil price hike together with earlier increases in other commodity prices provided a dramatic example of the impact of import prices in the early 1970s. Unions, intent on trying to main­tain real wages, demanded and obtained a compensating rise in nominal wages, which in turn employers passed on in prices, thus creating a vicious spiral of inflation. Wage bargaining could, and did, also provide a primary impetus in this cost-push world. Unions aiming for an increase in real wages achieved above inflation pay rises, only for employers to pass on the cost in their prices, again potentially causing an inflationary spiral. These fears reached their peak in the early to mid-1970s. As the Appendix at the end of this chapter shows, from 1973 until 1981 retail price inflation was in double­digits in every year except one, peaking in 1975 at nearly 25%. In many more years than not, earnings inflation exceeded price inflation.

It was one thing to take an anti-classical view of the world and to be con­cerned about cost-push inflation and quite another to believe that incomes policies were a sensible tool of economic management.

Comprehensive incomes policies can be more or less formal and more or less stringently applied. Nevertheless, they can fairly easily be grouped together generically to produce a family of policies which, although they range from statutory enforceable policies to a voluntary Social Contract, have certain fea­tures in common. Firstly, there is a norm which specifies the permissible rate of increase in pay. Secondly, there is usually, although not always, some provisions for additional increases in specified cases, either by applying certain pre­determined rules or as a result of special examination or recommendation by some approved body (Robinson and Mayhew 1983: 7).

The essential point to understand when assessing Robinson’s approach is that, at the time, he could not foresee a situation when collective bargaining was not the dominant mechanism by which pay was determined. At the same time, unemployment was rising to frighteningly high levels and inflation sometimes seemed in danger of getting out of control. In this climate, Robinson saw a limited defence of conventional incomes policy, which was one of timing. It could delay inflationary pressures with, he established, very limited allocative costs. One potential problem raised by some commentators at the time was that once a given policy was lifted, the reaction, known at the time as “bounce back”, of the relevant actors would be such as to produce even greater inflation than there would have been in the absence of the policy. Again, Robinson demonstrated that this was far from an inevitability. Therefore, both as an academic and policy adviser, he devoted himself to mas­sively detailed work on the design of policy—on how and why to allow for exceptions, on how to set pay limits, and on how restraint should be gradually relaxed and finally lifted. Arguably, he had no peer in these respects.

Nevertheless, in some ways, McCarthy’s interpretation of Robinson’s think­ing was correct. He believed that structural and attitudinal changes were needed to improve the performance of the labour market. Robinson empha­sised that, strangely, this was not so far removed from the thinking of the followers of Friedman. Friedman indeed thought that the economy had to be run at the natural rate of unemployment in order to achieve stability of infla­tion. However, he also stressed that if a government judged that this level of unemployment was unacceptably high, it needed to resort to structural mea­sures to reduce it. In many respects, this was what Thatcherite policy was subsequently all about. Furthermore, just as much as Thatcher, Robinson understood that changing the balance of power between unions and employ­ers might well be a vital ingredient in such reforms. He also recognised that social security reform, either by reducing the level of out-of-work benefits or by tightening eligibility criteria, could change the reservation wage and make the trade-off between unemployment and inflation less severe. What set Robinson apart from most economists of the time was a belief that a perma­nent incomes policy might itself achieve structural reform. In 1983, he wrote that he had ‘no doubt that the apparent gains and losses of a comprehensive incomes policy look far more favourable when compared with the results of the present package of government policy measures which include unemploy­ment of well over three million' (Robinson and Mayhew 1983: 138). He continued: ‘The depressing feature of the present policy discussion is the refusal of trade unions to recognise that there are serious problems in reconcil­ing counter inflationary policies with high employment. Some structural or attitudinal changes are imperative' (ibid.) and that:

Attitudes and value judgments cannot be changed overnight. They are more likely to be changed if those whose perceived self-interests are to be adversely affected can be persuaded that the new criteria and standards are generally acceptable and acceptable to those whose opinions the adversely affected groups regard as legitimate or reasonable. To this end we would hope that trade unions might be persuaded to participate in an incomes policy. If they do not, there seems little prospect of them achieving their other objectives (ibid.: 139).

In other words, Robinson fully recognised a need for structural reform. However, as late as the early 1980s, he still saw unions as a vitally powerful force in the UK economy. This was unsurprising given that, as we have seen, union density had reached its highest ever level at the end of the previous decade. Furthermore, the miners went on strike twice in the early 1980s, causing major industrial and political disruption. Thatcher felt too weak to take them on during the strike of 1982. It was only during the second strike in 1984 that she went on the offensive, bolstered by massive stockpiles of coal. Moreover, Robinson retained his political stance that collective bargaining was the best way of determining wages in an economy that desired a balance of power between workers and employers in order to produce distributional fairness. He saw a long-run incomes policy as a central tool for achieving this by persuading the union movement to moderate short term, sectional think­ing in favour of taking a longer-term, more coordinated stance. His research on pay determination elsewhere, particularly in the Netherlands and Northern Europe, encouraged him in this view. Freeman and Medoff^,s paper (1979) on the two faces of unionism chimed with Robinson's take on the role of unions. Freeman and Medoff contrasted the monopoly face of unions where bargain­ing was a zero-sum game with the collective voice face. In the right environ­ment, where bargaining could be across an extensive range of issues, the expression of the collective voice could provide employers with a range of information about the concerns, observations and suggestions of their employ­ees which could enable a non-zero-sum game. It was this which Robinson believed could be achieved in a carefully designed and implemented national incomes policy. He was realistic about the extremism, often politically motivated, of some union leaders. That is why he had always believed that some legislative interference was necessary.

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