The Bank of England is licenced to rig the labour market
On 3rd May 1997 (the second day of the New Labour government), the setting of interest rates was handed over to the Bank of England. A Monetary Policy Committee was set up for this purpose, and its remit was to keep inflation at its target level of 2.5% (this has since been changed to 2.0%). This move was widely lauded at the time by mainstream economists and journalists.
Like all other central banks which practice inflation targeting, the Bank of England is compelled by its remit to use unemployment as a tool, or more appropriately, a weapon, to bear down on wages. The Bank`s website, under the heading “Monetary Policy Framework” tells us that:
“The Bank’s monetary policy objective is to deliver price stability – low inflation – and, subject to that, to support the Government’s economic objectives including those for growth and employment”
The words “subject to that” tell us that the Bank`s remit is to prioritise low inflation – employment is necessarily placed as a lower priority precisely because unemployment is used to exert downward pressure on wages.
The Bank`s remit springs from the doctrine followed by most governments and central bankers increasingly since the mid-1970s which insists that any attempt to reduce unemployment below a “natural rate” will result in inflation, and that as long as unemployment continues to remain below the “natural rate” then inflation will continuously accelerate, leading to hyper-inflation.
There are 2 distinct situations (which may occur simultaneously) where the bank will be concerned about the emergence of inflation:
a) A general rise in non-labour costs for business
b) A general rise in labour costs for business
A general rise in non-labour costs
A general rise in non-labour costs for business will occur when there is a rise in the price of a key commodity like oil. This is known as a “price shock”, which can happen quickly, and will reduce the profit margin of business unless prices are raised or the cost of labour is reduced.
In the minutes of its March 2008 meeting, the Monetary Policy Committee of the Bank of England expressed concern about rising commodity prices. While they noted that “Real take-home pay had been falling” they were very clear that “following the sharp rise in businesses’ input costs, [it] would need to fall further”. They went on to say that “It was unclear whether employees would, to some degree, resist further erosion of their spending power”, before spelling out the solution if workers were to resist, even “to some degree”(!):
“If they did so, the rise in commodity prices could only be accommodated without putting pressure on inflation if there were to be some rise in unemployment.”
The behaviour of central banks in these circumstances demonstrates that they prioritise the preservation of the profit margin of business over the preservation of wage levels. This is done without any regard to how low wages already are for workers at the bottom of the payscale and how high profit margins already are.
More can be read on imported inflation at this webpage: The “solution” to imported inflation – more unemployment!
A general rise in labour costs
A general rise in labour costs for business occurs during a boom, when the bargaining position of workers improves due to the lower level of unemployment. As has been mentioned in the introduction, the late 1990s was a time in which there was relatively low unemployment, this coincided with a rate of earnings growth which alarmed some economists, journalists, and central bankers, who called for an increase in unemployment.
The minutes of the Bank`s June 1998 meeting, for instance, reveal a concern that wage rises indicate a need for unemployment to rise:
“the earnings data suggested that it was more likely that unemployment was below the rate compatible with stable inflation. In that case, it was probable that unemployment would have to rise to hit the inflation target on a sustainable basis.”