Crucial Showdown over Pay

Powerful, fractious and strike prone, Britain's labor unions have contributed heavily over the years to the sagging productivity and destructive wage inflation that have brought their nation to the brink of economic disaster. Last summer it took the threat of imminent economic collapse to win agreement by the unions to a voluntary limit on pay. This week Britain faces another crucial test of its ability to get labor cooperation in surmounting the nation's frightening economic woes. Leaders of the Trades Union Congress have set themselves a deadline of Wednesday for deciding whether to agree to a government proposal for even tighter restrictions on raises or to formulate a policy of their own. Whatever the leaders recommend will be voted on in June by the T.U.C.'s 10 million members.

The bargaining is the first major challenge for new Prime Minister James Callaghan. His Labor government is pressing on the T.U.C. a novel proposal: accept another year of stringent wage restraint in exchange for a substantial cut in workers' income taxes. The government's plan, detailed by Chancellor of the Exchequer Denis Healey, calls for limiting pay increases to 3% (an average of $3.70 per week) over the twelve months starting Aug. 1. That is the expiration date for present voluntary wage controls, which limit all raises to -L-6 (at present exchange rates, a bit less than $12) a week. Healey argues persuasively that the combination of low raises and lower taxes would give everyone more purchasing power than higher pay boosts, which would be promptly swallowed by accelerated inflation.

The unions' first reaction was antagonistic. In the tradition of trying to improve on what Healey termed the government's best offer, T.U.C. leaders demanded that the limit on raises be upped to 5%--and that their members get the tax cuts too. But as the talks ground on last week, the T.U.C. and the government exhibited a growing willingness to compromise.

The need for a speedy and sound agreement can hardly be overemphasized. Uncertainty about the outcome of the pay talks has caused nervous investors to dump sterling. Last week the pound hit a record low of about $1.80 before rallying to close at $ 1.84--still down 8% against the dollar in less than two months. No significant recovery is likely until a workable pay policy is adopted and investors' fears of a new burst of inflation are put to rest. A cheaper pound will give British goods a price edge in world markets; it is already driving hordes of bargain-hunting tourists from the U.S. and Europe to Britain. But the drop in sterling will also add fuel to the nation's inflation by increasing the cost of imports, including such essentials as food and raw materials.

Wage Austerity. A tight limit on raises is a key element in the government's strategy to revive Britain's faltering industry without kicking up prices. In his first major speech since assuming office on April 5, Callaghan argued that a refusal by the unions to go along with the government's plan would mean "more unfairness, higher prices and more jobs lost." The government has been especially encouraged by the relative success of the current pay policy. When the program took effect last August, inflation was galloping ahead at an annual rate of 26%; today it is 13%. But if the government is to achieve its goal of slowing inflation to a rate of 9% or less by March, a second year of strict wage controls is essential.

Healey is also concerned about the tendency of wages to drift up even under controls because of unexpected overtime, costly seniority rules and other factors. For example, the present pay policy was calculated to permit earnings to rise only about 10% a year, but they have actually risen at a 13% pace. Thus Healey is not willing to agree to, say, a 4% limit unless the unions can come up with a way to prevent the increase from leading to any significant drift.

Differing with Healey are such key labor leaders as Jack Jones, chief of the Transport and General Workers' Union, and Len Murray, T.U.C. general secretary. They insist that a 5% limit is feasible, provided it is matched by import controls and strict regulation of prices. But the government is opposed to curbs on imports, believing quite rightly that they would only provoke retaliation by other nations and choke off any chance that Britain has of an export-led recovery. Healey also wants to loosen rather than tighten price controls to give British industry sufficient profits to invest more heavily in badly needed new plants.

Though anything could happen, the portents are favorable. T.U.C. leaders are well aware that if they take an obdurate stand and force Healey to withdraw all or part of his popular offer of tax relief, they will be blamed. Labor would also be faulted for a further drop in the pound and more inflation.

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