The UK government has announced public sector pay rises of between 5% and 7% for public sector workers. Whether or not these rises will be accepted is yet to be seen. The Consumer Prices Index (CPI) rose by 8.7% in the 12 months to April 2023, down from 10.1% in March.
This means that the pay rises are still below inflation levels. In fact, one argument from the government is that they don’t want to offer huge pay rises because it will contribute to inflation.
Here is the theory: Government spending increases aggregate demand, which leads to increased prices.
But does this apply with public sector pay?
So firstly, there is do direct on inflation: Consumers aren’t charged more for the cost of education or other public services. There is an argument that there is also no indirect impact on inflation: public sector wage increases do not lead to an increase in private sector pay and therefore prices.
A group of senior economists, including the Nobel laureate Christopher Pissarides, has published a paper which concludes that rises in public sector pay would not prolong or increase inflation, even if they matched the 10.1 per cent rise in the consumer prices index.
🤓 What do you think? 🤓
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