Quietly, the unions flex their muscles

"It's like banging your head against a brick wall - it feels good when you stop. We haven't stopped yet, but it's beginning to feel better already." So says a trade union policymaker, sensing the advent of a Labour government in 18 months' time. Union membership has halved since its peak in the Seventies, but union leaders feel that they have survived Thatcherism and are - in private - more upbeat about the future than at any time since the 1978-79 Winter of Discontent.

We are not, of course, heading back to the age when union barons ruled at the court of 10 Downing Street. And there is little prospect of a sudden upsurge of militancy - as the receding threat of strike action at Ford and Vauxhall proved yesterday. Union leaders do not doubt that it would be different next time. The leaders of the three largest unions, Rodney Bickerstaffe, John Edmonds and Bill Morris, do not expect - as the Scanlons, Basnetts and Joneses of the Seventies did - to be deciding a Labour government's economic policy. But they do feel that they are coming in from the cold. Beer and sandwiches at Downing Street would be "nice, but not necessary", according to one union leader. Behind the careful words about being "accepted as a legitimate part of British public life", one senses a tingling of anticipation at the thought of once again being powers in the land.

So what do union leaders expect of a Labour government, and how would Prime Minister Blair and Chancellor Brown treat them? There are several routes back to influence for the unions that do not lead directly through the door of No 10. If there is a Labour government, there will be some apparently low-key but highly significant changes in the legal framework under which unions operate. Tony Blair has made it absolutely clear that there will be no going back on the main Conservative reforms - and few union leaders want him to. But there would be a new law requiring employers to recognise unions where the majority of the workforce want it. That means that companies such as Marks & Spencer - along with less beneficent organisations - would be forced to recognise a union. This means a great deal to the unions' ability to recruit and to gain leverage.

In addition, workers have been promised the right not to be sacked for going on strike. This has been denounced by the Tories as a "striker's charter", although in practice it amounts only to the right to compensation for unfair dismissal. But both measures will tilt the balance of power in industrial relations modestly back in favour of unions against employers.

More important, perhaps, would be Britain signing up to the European Social Chapter. This would give unions a role in framing European legislation. The parental leave directive, for example, which will give new parents in other EU countries the right to 12 weeks' unpaid leave, was agreed by European employers and unions without directly involving governments.

Blair's speech to the CBI earlier this month was curious in this respect. He insisted that a Labour government would not accept each and every proposal from Brussels. But the point about opting into the Social Chapter is that it would remove Britain's veto over proposed Euro-laws.

It was an example of Blair failing to "say what we mean and mean what we say", because to union and Labour Party audiences the unequivocal commitment to the Social Chapter is a big crowd-pleaser. TUC sources politely say they were "puzzled". But this is only the latest incident in the edgy relationship between the unions and the Labour leadership. Union barons are bruised and smarting from their exclusion from the Labour leadership's inner counsels since Blair became leader.

Bill Morris, of the once-mighty Transport and General Workers' Union, for example, has not forgiven Blair for the unidentified "aide" who described him as "confused, muddled and pusillanimous" on the question of Clause IV and public ownership - or for the challenge for his job from Jack Dromey, Blair's closest ally in the union. Yesterday he told the Independent: "I am looking forward to a constructive relationship with a Labour government in which we can work as partners in tackling the problems facing the British economy, in particular cutting unemployment and launching an assault on poverty."

This says nothing, of course, about the issues that could lead to conflict. Blair has already been warned privately by union leaders that his first problem might occur in the public sector, and in particular from the 1.6 million workers in local government.

Senior officials of Unison, the public service union, recently sat down to a meal with the Labour leader to warn him about possible difficulties over pay. "They don't seem to have a policy towards public sector pay. I think they ought to start thinking about one," a Unison official said.

The scene has already been set. Local council unions will submit a claim next month that would add more than 3 per cent to the total pay bill.

Assuming the claim is brushed aside, the same aspirations would emerge 12 months later at a time when a Labour government could be about to take power. Which is why it is so significant that the council workers' claim will probably include an attempt to set a "minimum wage" for council workers. The claim could well mention a figure of pounds 4.15 an hour, which was - coincidentally - what the unions wanted Labour's national minimum wage to be. It would mean a rise of 12 per cent for the lowest-paid council workers, currently on pounds 3.71 an hour.

The unions' claim links two issues on which a Labour government would face a tidal wave of high expectations - workers in the public sector will expect to "catch up" after 16 years of Tory austerity, and activists in the unions and the Labour Party will expect Morris's dramatic "assault on poverty".

The pressures on a Labour government were illustrated by John Monks, the TUC leader, commenting on Gordon Brown's tax-cutting plans last weekend. "Our emphasis is rather different than Gordon's. Rather than tax cuts, the emphasis should be on increasing spending on the areas that need it most - the long-term unemployed, those who need homes and also the transport system," he said in a television interview. And Monks is an unrepentant moderniser.

Blair and Brown have consistently tried to lower expectations - in private meetings with union leaders as well as in public. But they have said little about how they would deal with upward pressures on wages. Apart from the weight of expectations in the public sector, the private sector will see stronger unions, a minimum wage and - possibly - lower unemployment.

This raises the Issue That Dare Not Speak Its Name - an incomes policy. This is the lesson of the Australian experience, which is highly influential with Blair. The Australian Labor Party has now won five elections in a row, and one of the key elements of its successful economic management has been the Social Contract between government, employers and unions.

The only move in this direction the Labour leadership has made is the plan to set up a Low Pay Commission, in which those same three parties will set the level of the minimum wage. Could this be the first institution of a New Corporate State?

We do not know, because only the free-thinking and outspoken Labour frontbencher Jeff Rooker has urged a debate about incomes policy. He pointed out that a minimum wage, by pushing up the earnings of the lowest paid, would put pressure on differentials further up the scale.

It is not at all clear how much either side has thought about these questions. Blair and Brown want to avoid any suggestion of a return to the discredited norms and contracts of the Seventies. And union leaders will not express their cautious optimism in public, because they know anything that looks like flexing muscles would hurt Labour's chances. But Blair cannot insulate a Labour government from the conflicts of the labour market, which means that his unwillingness to discuss the tensions ahead could spell trouble.