Back to the Future: A Defence of the Social Contract

Britain’s standard image between 1974 and 1979 is one where overmighty trade unions, enabled by Labour’s Social Contract, ran the country; this is banal.

By Alex Maguire

However, the Social Contract, and its eventual fate, is an important and interesting part of Labour Movement history. The Social Contract ran across two different Labour ministries and prime ministers, having begun life while Harold Wilson was Leader of the Opposition, it continued into James Callaghan’s ministry after he replaced Wilson as Prime Minister on 5 April 1976.  As an incomes policy, the Contract had four distinct stages: 

  • Stage One: August 1975- July 1976, maximum £6 per week increase. 
  • Stage Two: August 1976-July 1977, £2.50 to £4 per week limit.
  • Stage Three: August 1977-July 1978, 10% limit to earnings increase. 
  • Stage Four August 1978-end of year, 5% limit to earning increase. This broke down with the Ford strike in September 1978 and the subsequent parliamentary vote against sanctions.

This article aims to give a brief overview of the Social Contract’s history, from its inception to its demise, and comment on what its strengths and weaknesses were.

When Labour entered power as a minority government in 1974, it did so with a new policy for managing industrial relations, the Social Contract. This was an agreement between the Labour Party and the Trades Union Congress (TUC) designed to control industrial militancy during an economic crisis and prevent wage increases causing further inflation which in 1974 already stood at 15.5%.

The need to control industrial militancy was keenly felt across the political spectrum; the previous Heath ministry had attempted to do so with the 1971 Industrial Relations Act which met with widespread opposition from trade unions and, as part of the Social Contract, was repealed by Labour after entering office in 1974. Before this, in 1969, Harold Wilson and Barbara Castle had attempted to push through in Place of Strife as a way of curbing industrial militancy. It significantly contributed to its electoral defeat in 1970.  

Thus, Labour recognised that the best approach for governing a country assailed by an economic crisis and resultant turbulent industrial relations was for co-operation with organised Labour. Although the agreement had resulted in the 1974 Trade Union and Labour Relations Act and the 1975 Employment Protection Act, the Contract itself was not a single piece of legislation. The closest the agreement had come to being defined was in an eponymous pamphlet in February 1973. However, this was effectively only a brief overview. 

While it did set out the parameters of the agreement, it did not set out how the processes by which the agreement would be enacted or the mechanisms for amending and adapting the Contract. Crucially, there was no specific commitment to income policy, even though it was accepted that this was a necessity and one of the main reasons the Contract came into existence. 

When Labour entered power in March 1974 the Contract’s parameters were not fully established until September 1974 after meetings between Employment Secretary Michael Foot and the TUC. Thus, in practice, it tended to function as a set of local and national relations and interactions based around workplace events. 

This meant that there was often friction between different parts of the Labour Party and the trade union movement throughout its existence. Indeed, Hugh Scanlon, president of the Amalgamated Engineering Union claimed, in 1974, that:

‘we see, as a union, the social Contract as merely a temporary expedient to get over a very serious situation here in Britain…. But we will not in my view ever be persuaded it can be other than a temporary expedient’

For most of the TUC, the Social Contract’s appeal was that the constraining 1971 Industrial Relations Act would be repealed and collective bargaining, albeit in a limited and measured form, would be upheld. As well as this, there were also food subsidies granted and a freeze on rent increases, and, crucially, full employment. In return, the TUC would ensure that workers would follow a voluntary wage restraint programme and limited industrial militancy.  

Unfortunately for both wings of the labour movement the policy proved unsustainable because of wider economic pressures.

Initially, the Social Contract worked. The government managed to avoid a wage-price spiral as increases in wages did not exceed the agreed level. Equally, the 1974 Nurses’ dispute, which was the first real test of the Social Contract and resulted in a significant pay rise for nurses, demonstrated how industrial militancy and negotiations were still possible and could lead to positive outcomes while remaining within the confines of income policy. However, the nurses’ dispute, which was initially detonated and driven by independent local action, highlighted the Contract’s incorrect assumption that central trade union bodies could reliably prevent/adequately control industrial militancy. This became one of the main failures of the Contract. 

The other failure was that, after securing a majority in October 1974, albeit wafer-thin one, and promising to limit public expenditure in a white paper published in January 1975, Labour started to renege on parts of the Contract. It was forced to do this by the increasingly severe economic reality that it found itself in.

The OPEC crisis’s effects meant that inflation rose from 16% in 1974 to a record high of 24% in 1975. On 5 March 1976 Sterling suffered its largest fall in a single day, mainly due to the Bank of England lowering interest rates and reducing its holdings of stifling from £1,800 to 800 million.

After this, the value of Sterling continued to drift and, eventually, the Labour government was forced to seek a loan from the IMF. Consequently, Labour had to enact significant cuts in public spending. 

This was because the Social Contract began to be eroded with public sector employees suffering the most.

Between 1975 and 1980 real wages fell by 13%. This undermined the Social Contract, as while the Contract had been created in order to prevent a wage price spiral it was assumed that doing this would also prevent a significant reduction in wages. In the first nine months of 1977 there were 30% more strikes and 150% more working days lost than in the same period of 1976, though inflation did continue to fall. The Contract was fraying and agitation within the TUC grew to the extent that in September 1977, at the annual TUC conference, a vote for the return to free collective bargaining in the summer of 1978 (after Stage Three’s expiration) was passed by a 2.8 million majority. 

However, trade unions mostly still supported the government in practice. This was highlighted by the TUC’s refusal to support the Fire Brigade strike in November 1977 in which the Fire Brigade demanded a 30% increase in pay at a time when the agreed limit with the TUC as part of Stage Three of the Social Contract was 10%.  The government used the Army as replacement labour, which, combined with the TUC’s lack of support for the strike, meant that the government emerged triumphant with the Social Contract battered but just about intact.

Although the TUC and the government recognised that the Fire Brigade’s success would encourage other workers to demand significant pay increases and contribute to rapid inflation, the Fire Brigade strike demonstrated the difficult position that the Social Contract placed trade unions in. By this point, it was evident that if there were to be future agitations for pay settlements that breached the Social Contract’s cap, then alliance between Labour and the state was not sustainable.

The precarious position of the Social Contract was exacerbated by Callaghan’s and Chancellor Denis Healey’s decision to install a limit of 5% on pay increases as part of the proposed fourth stage of the Social Contract in the Spring of 1978, removing the possibility of trade unions returning to free collective bargaining. Callaghan felt that this was necessary because the then forecasts for the national inflation rate were between 7 and 8%.  

In the context of the deteriorating quality of living faced by most workers in the United Kingdom this 5% ceiling was unacceptable, and it became increasingly untenable for trade unions to ignore the militancy of their members agitating for improvements in pay; it was, after all, their duty to represent their members. Thus, the TUC voted to reject the 5% at a meeting on 26 July 1978, though it still avoided a prolonged confrontation with the government. Unfortunately, this was an untenable position to too many of the workers that the TUC constituent unions represented. 

The 5% ceiling’s impossibility was highlighted by the Ford strike that started on 22 September 1978. The strike started with a walkout at the Halewood plant outside Liverpool and rapidly escalated as workers at other Ford factories across the country followed suit. The strike lasted eight weeks and ended with Ford risking government sanctions and acquiescing to a 17% pay rise to their workers, most of whom were represented by the Transport and General Workers Union. More damaging was the government’s failure to pass a bill through parliament (losing 285 to 279)that would have applied sanctions to Ford for breaking the 5% limit. 

The 5% ceiling was irreparably broken and, with it, the Social Contract. As a result, the following January a series of industrial disputes, largely driven by grassroots militancy and pre-existing grievances, erupted across the country in what is now known as the Winter of Discontent. Although the Winter of Discontent’s size and impact was exaggerated at the time and has since become a dangerous political myth, it cannot be denied that there were multiple bitter, difficult, and often traumatic disputes.

These disputes comprehensively demonstrated the limited ability of trade union executives to prevent members, driven to desperation by years of extreme economic conditions, from engaging in militancy. Often, the best that trade unions could hope for was to steer/harness their members’ militancy and reach a settlement as quickly as possible. 

The Social Contract had irrefutably failed. This failure was due to a combination of overwhelming economic forces, government misjudgement, and the impossible position that this placed trade unions in. The TUC had tried to support the government. However, eventually, its constituents’ unions had been forced to support their members’ demands, the limits of the extent to which organised Labour could support the state ahead of its own members had been aptly demonstrated.

The Social Contract’s failure and the resultant industrial turmoil had a catastrophic effect on the Labour Party and organised Labour. The Winter of Discontent ensured that Labour lost the election in 1979. It would not return to power until 1997. By that point, it had undergone significant institutional changes and gone through five different leaders, six including Margaret Beckett’s brief stint as acting leader. In the intervening period, Britain was irreversibly transformed. Thatcherite governments systematically dismantled organised Labour and industrial communities. 

These governments also abandoned the commitment for full employment and continuously traded employment for political power, with unemployment peaking at 11.9% of working adults over 16 in 1984 and between 1983 and 1986 did not drop below 3 million. Trade union membership, which at its peak in 1979 was thirteen million and accounted for just over 50% of the workforce, dramatically fell as de-industrialisation, unemployment, and anti-trade union legislation resulted took their toll. Today, trade union membership, even accounting for a pandemic induced boost, stands at just over six and a half million. 

When Labour returned to power in 1997 it felt the need to carefully manage the public perception of its relationship with trade unions. Before entering office, Tony Blair told The Times that ‘I have staked my political reputation and credibility on making clear that there will be no return to the 1970s’. 

New Labour made significant improvements to employment legislation; the 1999 Employment Relations Act, the 2002 Employment Act (and its sequel acts), and the 2010 Equalities Act all enshrined workers’ rights and provided trade unions with useful tools for defending the rights of workers. 

The importance of these Acts, and their utility, should not be understated. Indeed, David Cameron’s ministry still felt that trade unions were powerful enough to merit enacting the punitive 2016 Trade Union Act and the reports of Boris Johnson’s ministry wanting to use Brexit as an opportunity to overhaul workers’ rights are a perpetual spectre haunting British labour relation, despite the recent government U-turn. 

However, while important and useful, the provisions of these acts predominantly functioned on an individual level and asserted the rights of the worker an independent worker. This employment rights settlement that protected workers but did little to support their organisation resulted from the Social Contract’s failure. The failure of the Social Contract was not pre-ordained at the time of its inception. The principle of the state seeking to formalise co-operation with bodies of organised Labour to navigate industrial turmoil, while maintaining employment, was eminently sensible. Indeed, the Social Contract came into existence when nearly half of the workforce were trade union members and membership was continuously increasing. Many employers had negotiated closed shop agreements with trade unions. 

The most effective course of action was negotiating with Labour rather than penalising it as the later Thatcherite governments did. Even with the catastrophic and unprecedented economic climate, the rate of inflation fell from its 1975 high of 24.21% to 8.26% in 1978; consequently, it cannot be reliably argued that trade unions could not reduce the upward pressure exerted on inflation by wage demand. 

Even Callaghan’s decision to implement a 5% pay ceiling, which pushed the Social Contract to breaking point, did not have to be the death knell of this settlement between Labour and the state. Had Callaghan opted for an election in the autumn of 1978, no later than November, as he was advised to by many trade union leaders, then Labour would probably have won and been in office to reap the rewards of its efforts to curb inflation and the prospering of North Sea oil. 

Thus, the Social Contract principle was not incorrect, nor can it be wholly blamed for Labour’s defeat in 1979. Unfortunately, the Social Contract concept has been dismissed because of Labour’s defeat and eighteen years out of power. In Britain today, the power of organised Labour has been substantially weakened, there is a thriving gig economy, and precarity continues to ensnare more people. 

The Social Contract had many positives, primarily acknowledging that friction in the workplace is unavoidable and the best way to navigate this is a co-operation between the government and bodies of Labour. Equally, it had many negatives, mainly that it over-estimated the capacity of trade unions to prevent industrial militancy in extreme circumstances and that the terms and conditions of the Contract were never codified in specific legislation and instead left as a series of varying interpretations and understandings that resulted in unnecessary friction between the relevant parties. 

Labour could do worse than attempt to forge a new Social Contract. Were a successor able to build on the positives and incorporate organised Labour into the state’s processes, then it would potentially be able to transform industrial relations and the lives of workers. 

Alex Maguire is a Unison member. He can be found on Twitter at @Alex_PT_Maguire.

9 thoughts on “Back to the Future: A Defence of the Social Contract

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