Académique Documents
Professionnel Documents
Culture Documents
n
,
X
,
W
e
/
P
e
,
U
)
I
I
C
o
n
f
l
i
c
t
o
v
e
r
I
n
c
o
m
e
D
i
s
t
r
i
b
u
t
i
o
n
W
=
W
(
U
,
U
)
I
V
F
e
a
r
a
n
d
T
h
r
e
a
t
W
n
=
W
n
(
U
,
X
,
F
,
T
)
n
=
1
W
n
*
=
,
F
,
T
)
W
=
W
(
W
e
/
P
e
,
U
)
I
I
I
C
o
n
f
l
i
c
t
o
v
e
r
W
a
g
e
R
e
l
a
t
i
v
i
t
i
e
s
W
t
+
1
=
P
e
g
(
W
e
/
P
e
,
W
e
u
/
P
e
,
U
,
U
,
F
e
,
T
e
,
*
,
n
,
X
)
V
M
o
d
e
l
F
i
g
u
r
e
1
3
.
1
W
a
g
e
D
e
t
e
r
m
i
n
a
t
i
o
n
i
n
t
h
e
U
K
degree of work intensity depends on the shape and position of the workers
eort function. The eort function is determined by the cost of job loss, but
perhaps even more importantly, by social, ideological and political factors
(Arestis and Skott, 1993; Skott, 1991). Wages are negotiated and negotia-
tions determine the nominal wage on the basis of price expectations and real
wage expectations, so that we may write the negotiated wage W
t1
as:
W
t1
P
e
f(W
e
/P
e
,W
e
u
/P
e
,U,z)
df/d[(W
e
/P
e
)] 0 df/d[(W
e
u
/P
e
)] 0 df/dU0, (13.1)
where the variable (W
e
/P
e
) is the expected real wage which serves as a guide-
line for wage comparisons, as neither workers nor employers have complete
information over wage relativities. The variable (W
u
e
/P
e
) stands for expected
real unemployment compensation, as an alternative to income out of work,
(U) is the unemployment rate, which reects the chance of re-employment
in case of job loss, and z comprises the degree of class conict, worker mil-
itancy, customs and ideas on fairness, as well as changes in demand for
labour. Higher real wage expectations or higher real unemployment bene-
ts increase pressure on wage demands. Improved unemployment compen-
sation changes the income distribution between those receiving income
from work and those receiving income from unemployment by favouring
the latter. In order to preserve the prevailing income structure, pressure on
wage demands increases. Falling unemployment rates increase the prob-
ability of nding alternative employment and strengthen workers power in
the labour market, again increasing pressure on wage demands.
We turn our attention next to discussing the eect of the individual ele-
ments of vector z, namely class struggle, worker aggressiveness, notions of
pay norms and fairness, and the growth rate of unemployment on work
intensity and ultimately on wage setting. Firstly, we turn to block II in order
to discuss the conict over the distribution of income between workers and
employers, and to workers aggressiveness in response to disappointed wage
aspirations (Rowthorn, 1977, 1995).
Wages are negotiated in a decentralized bargaining process and provide
workers with a negotiated wage share, which, after the claims of the govern-
ment (T) and foreign sectors (F) are satised, provides rms with a residual
negotiated prot share (
n
). After the wage settlement, employers set prices
as a mark-up over costs in order to achieve their target prot share (
*
).
Since wage and price setting are not centrally coordinated, there is no
mechanism that ensures that the conicting claims of the private sector are
reconciled. The aspiration gap (
*
n
) measures the extent to which
actual real wages dier from target real wages and thus measures the degree
of conict between workers and employers over income distribution. The
Wage and unemployment determination in the UK 193
aspiration gap is determined by workers and employers power and their
willingness to use it in the labour market and the product market, respec-
tively. Workers are the more successful in wage claims, the lower is the rate
of unemployment (U) and the more aggressive they are (x). Workers bar-
gaining power lies in their ability to withdraw labour; that is, they may
threaten industrial action or, alternatively, they may reduce work eort in
a less dramatic way.
The third element in vector z introduces the notion of fairness (block
III). Although the struggle over income shares may be based on views of
what workers and employers consider fair income shares, here we are con-
cerned with the wage structure, where workers resist money wage cuts for
fear of a decline in their relative position in the wage hierarchy (Keynes,
1936). The importance of preserving the existing wage structure may be
explained by the notion of fairness (Hicks, 1975). A wage system with well-
established wage dierentials is regarded as fair: it has the sanction of
custom. It then becomes what is expected; and (admittedly on a low level
of fairness) what is expected is fair (Hicks, 1975: 65). The real expected
wage (W
e
/P
e
) is understood in this context as the historical element that
aects the eort function and the negotiated (real) wage.
So far we have emphasized the role that unemployment plays in mitigat-
ing wage demands. Turning to the fourth element of vector z, namely the
growth of the unemployment rate, we will be more specic in discussing the
eect of the unemployment rate on the eort function (block IV). Even
when the level of unemployment is very high, there is little pressure on
unions to sacrice wage increases for the hope of a better employment
outlook. In contrast, when the unemployment rate is rising, employed
workers fear losing jobs and the faster unemployment rises, the more
threatened workers feel and so may give in on wage objectives. The mecha-
nism of unemployment as a disciplinary device in wage demands requires
not only the existence of high unemployment, but, more importantly, a
rising ow into unemployment which is a threat to those still employed
(Boddy and Crotty, 1975). Changes in the unemployment rate (U) is an
additional variable in the wage equation, capturing the eect of threat and
fear in wage settlements.
We may summarize that the cost of job loss, wage aspirations, militancy,
pay norms, and the growth of unemployment aect workers eort func-
tion and the negotiated wage as follows:
W
t1
P
e
g(W
e
/P
e
,W
e
u
/P
e
,U,U,F
e
,T
e
,*,
n
,X)
dg/d[(W
e
/P
e
)] 0 dg/d[(W
e
u
/P
e
)] 0 dg/dU0
dg/dU0 dg/dF
e
0 dg/dT
e
0 (13.2)
dg/d*0 dg/d
n
0 dg/dX0,
194 Post Keynesian econometrics, microeconomics and the theory of the rm
where F and T account for claims of the foreign and government sectors,
respectively, on the output of the private sector.
We assume that the variables in equation (13.2) are additively separable
and loglinear, so that we may write:
w
t1
p
e
1
(w
e
u
p
e
)
2
(w
e
p
e
)
3
[p
e
w
e
lp
e
e
]
4
[pwlp] (13.3)
5
x
6
u
7
u
8
ti
9
ti
e
,
where lower-case letters denote logarithms and where all coecients are
greater than zero. The vector ti stands for the claims of the foreign and
government sectors on private output and contains real import costs and
tax variables. If the claims of the government and foreign sector increase,
there is less output available for distribution of income between employers
and workers, and conict arises over who will bear the costs. The rise in
conict increases wage ination. The expressions in square brackets
describe the aspiration gap as discussed above, but without the tax and
import cost variables, as they are already included in vector ti.
2
The rst
square bracket describes the target prot share as a mark-up over real wage
costs in dependence of the demand conditions in the product market,
proxied by capacity utilization . Excess capacity limits employers ability
to raise prices. Capacity utilization is itself explained by capital stock and
output, where the latter indicates the level of economic activity which is
proxied by the unemployment rate (Rowthorn, 1995).
The preceding equation implies:
w
t1
w(1
1
3
)(p
e
p)
1
(w
e
u
w
u
) (
2
3
)(w
e
w)
3
(lp
e
lp)
(
2
1)(wp)
1
(w
u
p) (
3
4
)(plpw) (13.4)
5
x
6
u
3
2
u
e
7
u
3
1
k
e
.
We assume that expectations are formed in the following way (Nickell,
1990):
s
e
ss
t
, (13.5)
where s stands for any variable. Taking into account the formation of
expectations, equation (13.4) can be rewritten as:
w(
2
4
1)(wp) (
2
3
1)(wp)
1
(w
u
p)
1
(w
u
p) (
3
4
)lp
3
lp
5
x
(
6
2
)u(
7
2
)u(
8
9
)ti
9
ti (13.6)
1
k
3
1
k.
Wage and unemployment determination in the UK 195
The relationship in equation (13.6) can be described as follows: nominal
wage acceleration depends on real wages, productivity, unemployment, real
benets, tax and import costs, capital stock, the expected changes in these
variables and a variable capturing militancy. Most of the variables included
are standard (Wren-Lewis, 1990; Hall and Henry, 1987; Layard et al.,
1991), except for the capital stock. The capital stock alters in response to
prolonged shocks such as the oil price shocks in the 1970s and 1980s
(Rowthorn, 1995). These shocks induced inationary pressure, so that
demand was curbed, unemployment rose and, in response to the decline in
demand, capital was scrapped. When oil prices fell, demand recovered and
unemployment fell, but not as low as before the shocks, owing to the loss
in capital stock. As a result, economies may operate with a higher level of
unemployment, a lower level of capital and normal capacity utilization.
The implications are obvious: government spending policies of direct
investment should be introduced and accompanied by an expansion of
markets for consumption goods. In order to promote expenditure in con-
sumption goods, a redistributive incomes policy would be needed that
would rely on the continuous increase in the minimum wage relative to the
average level of wages. If the government fails to intervene, there is no
reason why the market should recover through its own forces and that
unemployment should fall to the level before the shocks.
We turn now to the long-run real wage equation, assuming productivity
neutrality with respect to unemployment, which implies that shifts towards
higher productivity growth increase demand and output in line, leaving the
level of unemployment unchanged (Blanchard, 1988). This is an assump-
tion that is widely backed by empirical results. Furthermore, in the long
run, we expect that (wp), (w
u
p), lp, ti, u and k are stationary,
so that we may derive the following long-run wage equation:
(wplp)
1
(w
u
p)
2
x
3
u
4
ti
5
k (13.7)
with
(1
2
4
)
1
2
3
4
5
.
When the target and the negotiated prot shares are equal, where the latter
is derived as a residual in the bargaining process, unanticipated ination is
zero and the equilibrium unemployment rate can be derived (Rowthorn,
1977). Assuming that rms mark up prices over labour costs, an aspiration
1
2
3
4
.
Long-run unemployment is an increasing function of real benets, tax and
import costs, and worker militancy, and declines with the increase in the
capital stock. A positive relationship between real wages and unemploy-
ment insurance implies that a fall in the latter results in a decline in unem-
ployment, due to its labour cost-reducing impact. However, a cut in wage
compensation may have other eects that outweigh the favourable cost
eects. In response to a fall in real benets, the unemployed may reduce
searching time, and they may have to accept jobs for which they are less
suitably qualied than they would have accepted if the cost of search had
been less. The consequent ineciencies in the labour market may have an
adverse eect on the unemployment rate and it may be an empirical ques-
tion as to which of the eects is more important. We return to that discus-
sion in the next section. An increase in taxes or import costs will, under
given demand conditions, increase conict over income shares and will
raise inationary pressure. The more wage earners resist a fall in their
income share, the lower are the tax and import eects on the long-run
unemployment rate. Worker militancy aects the bargained real wage and
ceteris paribus income distribution, where the latter determines the level of
employment through its supply and demand side eects.
III THE EMPIRICAL MODEL
The data is seasonally adjusted and the estimation period is from 1966(Q1)
until 1994(Q4). The denition and source of the variables are provided in
the appendix. It is notoriously dicult, and admittedly an unsolved
problem, to capture militancy. We chose the number of strikes, although
knowing that strikes are only a fraction of all wage ghts and that only a