Leading Article: Beware a new wage spiral

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How does a pay rise of 5 per cent sound to you? It is higher than inflation and well ahead of the average pay settlement. It is certainly better than the public sector will get this year. Yet once you stop to think about how much harder you are working, the new contracts which make your job less secure, the growing profits your company is making, and the soaring salary of the chief executive, then you might not feel it is unreasonable.

Your reaction matters a great deal to the economists who are watching the dispute at Ford over the management's pay offer of 4.75 per cent. If pay settlements start rising following the Ford example, we could be in for the wage boom that the Bank of England fears. But if the rest of the economy remains cautious and subdued, unaffected by the deals done at Dagenham, then pay and inflation could keep crawling along at their current rate.

In the past Ford's pay settlement mattered a lot. Wage increases at Ford used to be "the going rate" - they set the standard in the car industry and for the rest of manufacturing. But it would be surprising if the old situation still prevailed. Wage bargaining has become increasingly decentralised and the workforce less unionised. Pay setters in the service industries probably focus far more on their own profits and skill shortages than they do on manufacturing pay. And as employment in the service sector goes on rising, while employment in manufacturing continues to drop, then events at Ford matter that much less in the context of the whole economy.

Although Ford's pay packets may no longer be the trigger that causes rising wage bills across the economy, what happens there may still reflect the feelings of workers and management elsewhere. The Ford workforce is so fed up its members are prepared to strike for what they see as their fair share of the proceeds from productivity gains of the past few years - whether it be through wage rises above 5 per cent, or cuts in the working week in line with European colleagues. There could well be similar demands for wage rises across the economy which have been bottled up after several years of wage constraints.

Service-sector wages won't necessarily be immune to these pressures either. For although weekly earnings in the services remain subdued because there are so many part-time workers, hourly earnings for full-time workers have already been increasing at a rapid rate - 4.6 per cent in the year to last spring.

So just because the rest of industry and the economy no longer blindly follows Ford's lead, doesn't mean our pay is not about to start going up. The optimistic view is that the labour market has changed in such a dramatic way, that the old British wage inflation spirals have been defeated. The pessimists believe it is just a matter of time before old pressures resurface - wage claims could even start accelerating in the spring. The Bank of England is right to remain worried about wages, for it could take months, even years to be sure who is right. By which time it could be too late.