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TUAC calls for recognition that inflation is being driven by profits, not wages

16 May 2023

Ahead of the OECD’s influential annual Economic Outlook, to be published on 7 June, the Trade Union Advisory Committee to the OECD (TUAC) urges the OECD to make policy recommendations for:

  • An immediate standstill on raising interest rates
  • The public sector to stabilise the economy and avoid austerity
  • Bringing attention to increased profits driving inflation – which are redistributing income from wages to profits
  • Promoting Collective bargaining to restore the purchasing power of wages
  • Policies to build resilience including industrial policy, selective price controls and public investments to build more secure supply and capacity, together with an in-depth discussion on the need for more flexible price stability targets in dealing with a more volatile global environment.

The trade union proposals come in a TUAC paper to the OECD which highlights key facts including that:

  • The impact on real economic activity of raising interest rates far outweighs the impact on inflation. Given that raising interest rates reaches maximum effect after two years, the ‘solution’ to inflation will hit well after inflation has gone down.
  • The negative economic impact of raising interest rates may be made worse by their impact on the banking and finance sector. If more financial market turmoil occurs, it could severely restrict lending and push the economy further towards recession.
  • Raising interest rates can reduce inflation in times of excess demand but will not reduce inflation caused by specific supply-side bottlenecks, as is the case with inflation triggered by energy supply problems.
  • There has been no wage-price spiral, but clear evidence that businesses have increased prices disproportionately to boost profits as well as cover (e.g. energy) higher costs. Triggering a serious economic slowdown to keep wage increases down at a time when real wages are already being cut and profits are increasing will accelerate the redistribution from labour to capital –thus making inequalities even worse.
  • Some policymakers are already advocating debt ceilings, stability pacts and re-imposing public debt ratios. The experience from a decade of austerity after the 2008 financial crisis shows that misjudged austerity fails to reduce public debt ratios but does damage economic performance and recovery – especially the recovery of working people.

The next OECD Economic Outlook cannot turn a blind eye to the fact that it is profits, not wages, driving inflation. Raising interest rates and imposing austerity will weaken the bargaining position of workers and accelerate the transfer of income from wages to profits. It would be the opposite of the OECD’s stated goal to shape policies that foster prosperity, equality, opportunity and well-being for all. The OECD needs to promote collective bargaining to raise wages to compensate for inflation, as well as tri-partite social dialogue to prevent central banks from unnecessarily putting jobs and economies at risk.

— Veronica Nilsson, Acting General Secretary, TUAC