No More the Social Contract

For 16 months Prime Minister Harold Wilson has cajoled, wheedled and haggled with Britain's powerful labor unions in a vain effort to stop their rampaging wage demands. The basis of his policy was the "social contract," a formal deal (although never written into law) between the government and the labor unions. The government would deliver social welfare benefits in exchange for voluntary restraints in pay settlements. Purpose: to keep workers abreast of--but not ahead of--inflation.

But the unions have welshed on the deal. One major union after another won pay raises of 30% and more; during the past twelve months, average weekly wage rates for manual workers rose 32.6%, leapfrogging ahead of the 25% inflation rate for the same period. Last week, after inflation had worsened and the pound sterling had hit a new low, Wilson and his Cabinet took a deep breath and finally scrapped the tattered social contract. Chancellor of the Exchequer Denis Healey announced that beginning with the September round of pay negotiations no wage increases above 10% will be allowed.

Fresh from his victory over the union bosses and the left wing of his own party in the referendum on staying in the European Common Market, Wilson had just set out to establish a new voluntary agreement on national pay and price guidelines between the unions and the government. Munching fresh strawberries at the Royal Agricultural Show in placid Warwickshire early last week, Wilson confidently declared: "We reject panic solutions."

Back in London next day, the Prime Minister had to eat more than strawberries. On the foreign exchange, the pound opened at an alltime low of 29.2% below the value fixed by agreement with Britain's main trading partners at the end of 1971. One reason for the drop: nervous Arab depositors began withdrawing funds from London banks. Kuwait alone converted -L-50 million into dollars in one day. A gentle slide of the pound had been viewed by many economists as a healthy means of erasing some of the trading disadvantages created by the differing rates of inflation between Britain and its competitors. But now the slide was clearly threatening to become a financial Goetterdaemmerung. Said one Cabinet minister: "Nothing can concentrate Harold's mind more quickly than a fall in the pound."

In an emergency Cabinet meeting, Healey presented a proposal for a wage-restraint policy backed by legal sanctions. Instead of waiting to hear the consensus of his Cabinet as he usually does, Wilson promptly backed Healey. He won the decisive approval of the Cabinet. The only holdout was Employment Minister Michael Foot, the silver-tongued tribune of the unions. Foot was given a face-saving week to try to obtain union agreement. But the Cabinet made it clear that the proposal would be introduced in Parliament whether or not the union leaders accepted it.

One leading firm of London stockbrokers calculated last week that Healey's plan will involve a record reduction in real wages of 4% or 5% over the year for British workers. The government is not committing the mistake of its predecessors in making the guidelines enforceable against individual workers or union leaders. Instead, the government will forbid private firms to pass on in higher prices any wage settlement costs above 10%--in effect, they will have to go along or face bankruptcy. Nationalized firms will be allowed to increase their total wage bill 10%.

"We have got a pistol at our heads," said Alan Fisher, head of the Public Employees Union. "I think we shall see a lot of difficulties in the next few months." The first signs of revolt came from Members of Parliament, who have forgone a pay raise since 1971 to set an example for the rest of the country. The M.P.s get about -L-5,000 ($11,000) in pay and allowances. Some are so hard-pressed that important votes must be scheduled in midweek because Members cannot afford to stay even in cheap London lodgings for more than three nights a week. A widely leaked government report recently recommended that M.P.s receive a 40% raise of -L-2,000 ($4,400) and possibly more. After Healey's announcement, 70 Labor backbenchers, fearful that they would be the first ones caught in the 10% net, threatened a boycott of committee meetings if they did not get the raise. Late last week a delegation took the matter to Wilson, pleading that they were a "special case." Wilson, in effect, promised them their money to help clear up "hangovers from the old pay round." Worse hangovers for the nation may be in store if Wilson cannot make the new guidelines stick when the big unions mount challenges to the government's authority in the new bargaining round this fall.

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