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Incomes Policies and Differentials∗

Published online by Cambridge University Press:  26 March 2020

A.J.H. Dean
A.J.H. Dean*
Affiliation:
National Institute of Economic and Social Research
*
∗The author would like to thank Bob Elliott, David Marsden, Ken Mayhew, Derek Robinson, the Department of Employment and colleagues at the National Institute for their helpful comments on an earlier draft.
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Extract

This article examines the extent to which differentials have been influenced by successive periods of incomes policies. The reason for interest in this subject is that one of the major supposed disadvantages of incomes policies is that they ‘distort differentials’. However we rarely get an explanation either of what these differentials are or in what way they are distorted. In this article we use various statistics on wages and earnings and attempt to find out whether incomes policies have had any noticeable impact on differences in pay between groups of workers.

Type
Articles
Information
National Institute Economic Review , Volume 85 , August 1978 , pp. 40 - 48
Copyright
Copyright © 1978 National Institute of Economic and Social Research

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References

(1) Pay Board Advisory Report 2, ‘Problems of pay relativi ties’, Cmnd 5535, HMSO 1974.

(1) See W. Brown and K. Sisson, ‘The use of comparisons in workplace wage determination’, British Journal of Industrial Relations, 1975, and H. A. Turner, ‘Inflation and wage differentials in Britain’, in J. Dunlop (ed), The theory of wage determination, Macmillan 1957.

(2) Adam Smith, The wealth of nations, volume 1, 1776. See also E. H. Phelps Brown, ‘The labour market’, in T. Wilson and Skinner (eds), Essays in honour of Adam Smith, 1976, and A. Rees, ‘Compensating wage differentials’, in A. Skinner and T. Wilson (eds), Essays on Adam Smith, 1975.

(3) Indeed most analyses have indicated that changes in tax rates and allowances in the 1970s have meant that movements in post-tax differentials have not followed gross pay differen tials at all closely.

(1) Although this is true on average some groups may actually receive higher increases than they would have done under a non-policy situation; for instance for some workers the £6 increase in 1975-6 was the largest rise they had ever achieved.

(2) See Pay Board Advisory Report 1, ‘Anomalies’, Cmnd 5429, HMSO 1973.

(3) In recent years opinion polls have consistently shown that a large majority of the public is in favour of pay restraint. See also H. Behrend, Incomes Policy, Equity and Pay Increase Differentials, Scottish Academic Press, 1973.

(4) Stage III was continued by the incoming Labour Govern ment and the Pay Board operated until July 1974.

(1) Apart from a pilot study in 1968 with only half of the later sample sizes.

(2) The existence of a regular wage round has been a subject of much debate. Up to 1973 the weight of evidence seemed to suggest that a national wage round did not exist but that there were ‘coalitions’ of workers which tended to follow each other quite closely (see R. F. Elliott, ‘The national wage round in the UK, 1950-73’, Oxford Bulletin of Economics and Statistics, 1976). Since 1973, however, successive ‘12 month rule’ clauses in the various incomes policies have virtually institutionalised an annual wage round.

(3) The highest decile refers to the earnings of the person who is one tenth from the top of the income distribution when earnings are placed in order; the upper quartile refers to the person one quarter from the top, etc.

(4) These periods do not of course exactly correspond to incomes policy periods. In particular November 1972-April 1973 was a period of ‘freeze’ and April 1975-July 1975 was a period of very rapid increases under the latter months of the original social contract (the earnings index increased by 8 per cent during this period). However, it is not thought that these slight differences in the phasing of the policies and the data would substantially affect the results.

(1) This particular point has also been made by Chris Pond for the Low Pay Unit in ‘For whom the pips squeak’, Low Pay Paper, no. 15, May 1977. That article concentrates on the low paid in particular, pointing out which Wages Councils did not achieve £6 rises, but it also makes some general points about the application of the £6 limit. Nevertheless, given the assumption that everyone received a £6 increase and that each point on the income distribution was raised by 8 per cent (the average increase recorded by the monthly index) between April 1975 (the date of the NES) and July 1975 (when the £6 limit was introduced), one would have expected the lowest decile for men to move from 67.0 to 70.1 and the highest decile to move from 157.6 to 152.6. The ratio of the highest to the lowest decile would then have moved from 2.35 to 2.18. As will be seen there was in fact a slight upward movement in the figure for the lowest decile but paradoxically also an upward movement for the highest decile instead of a strong fall, so that the ratio of the two remained virtually unchanged. Despite the limitations of the data and the rumours of evasion of the limits this result is really extraordinary.

(2) These are given in table 1 of the article on ‘Pay differentials and the dispersion of earnings’, Department of Employment Gazette, June 1977. Figures for 1977 have also been made available to the author. They show a further movement in the year to April 1977 from 265.5 to 264.1 for men and from 260.2 to 245.9 for women, the latter being a substantial change. One could argue that because of the Top Salaries Review Body there has been an informal incomes policy for the higher paid in the public sector throughout the 1970s.

(3) There are several reasons why this narrowing may not have taken place, but a widening in the differential is still surprising. The April 1975-April 1976 period included 3 months of the original social contract period when there were no limits on pay rises. Then, during Stage I, promotions and job changes were permitted. It is nevertheless difficult to avoid the conclusion that increases larger than the limits were the norm rather than the exception for the highest paid workers in this period.

(4) These matters and others have been extensively explored in a PEP study of pay differentials in the 1970s. That study investigates the evidence provided by the NES but is not specifically concerned with the effect of incomes policies although the conclusions for pay policies are discussed in chapter 4. See C. Saunders et al., Winners and losers; pay patterns in the 1970s, PEP, London 1977.

(1) The dispersion of earnings excluding overtime did in fact narrow by more than the dispersion including overtime between 1975 and 1977.

(2) Various analyses of the movements of relative rates of pay in different occupations from 1973 to 1977 have been made using NES data. These indicate a wide variety of different movements, with the only significant pattern being the much slower growth in the earnings of the highest occupational groups compared to other groups; as an example the ratio of the average gross weekly earnings of accountants compared with secretaries and shorthand-typists fell from 2.20 in 1973 to 1.76 in 1977.

(3) The June results are published in the October issue of the Department of Employment Gazette each year. This sample inquiry is also carried out in January for shipbuilding and chemicals but we confine ourselves to the June results. The figures are for male manual workers only.

(1) Controls on rates may be offset by increases in earnings brought about by wage drift. Later policies, learning from this experience, often referred to limits on total wage bills or tried to limit drift by allowing only increases in rates.

(1) It may be that these wartime movements occurred because of the ‘dilution of skills’ which happened at those times. It has often been suggested that the recent narrowing is a reflection of the increasing power of the unskilled unions.

(2) See chapter 4 in National Economic Development Office, Engineering craftsmen; shortages and related problems, 1977, and also the interesting discussion of changes in the pay structure in chapter 3 of E. H. Phelps Brown, The inequality of pay, Oxford, 1977.

(3) R. F. Elliot and L. J. Fallick, ‘Pay differentials in perspective; a study of manual and non-manual workers’ pay over the period 1951-75', University of Aberdeen Occasional Paper, no. 77-07.

(4) William Brown, ‘Incomes policy and pay differentials; the impact of incomes policy upon workplace wage determination in the engineering industry, 1972-75’, Oxford Bulletin of Economics and Statistics, February 1976.

(5) R. F. Elliott, ‘Public sector wage movements; 1950-1973’, Scottish Journal of Political Economy, June 1977.

(6) A. J. H. Dean, ‘Earnings in the public and private sectors, 1950-1975’, National Institute Economic Review, November 1975.

(7) See ‘Earnings of employees in the private and public sectors; April 1970 to April 1977’, Department of Employment Gazette, December 1977, and A. J. H. Dean, ‘Public and private sector manual workers’ pay 1970-1977', National Institute Economic Review, November 1977.

(8) R. F. Elliott, op. cit.

(1) D. Robinson, ‘Differentials and incomes policy’, Industrial Relations Journal, Spring 1973.