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Wage-Rates, Earnings, and Wage-Drift

Published online by Cambridge University Press:  26 March 2020

C. Gillion
C. Gillion*
Affiliation:
National Institute New Zealand Institute of Economic Research
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Extract

This article describes an attempt to establish by regression analysis the form of the relationships which determine wage-rates and average earnings in the United Kingdom.

Type
Research Article
Information
National Institute Economic Review , Volume 46 , November 1968 , pp. 52 - 84
Copyright
Copyright © 1968 National Institute of Economic and Social Research

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References

note (1) page 52 L. A. Dicks-Mireaux, The Interrelationship Between Cost and Price Changes, 1946-1959; A Study of Inflation in Post-war Britain’, Oxford Economic Papers, October 1961.

note (2) page 52 L. A. Dicks-Mireaux and J. C. R. Dow, ‘The deter minants of wage inflation : United Kingdom 1946 to 1956’, Journal of the Royal Statistical Society, 1959.

note (3) page 52 L. R. Klein and R. J. Ball, Some econometrics of the determination of absolute prices and wages’, The Economic Journal, September 1959.

note (4) page 52 R. G. Lipsey, The relation between unemployment and the rate of change in money wages in the UK : 1862 to 1957; a further analysis’, Economica, February 1960.

note (5) page 52 A. W. Phillips, The relation between unemployment and the rate of change in money wages in the UK : 1861 to 1957,’ Economica, November 1958.

note (6) page 52 J. D. Sargan, Wages and prices in the United Kingdom : a study in econometric methodology’, Colston Papers, 1964.

note (7) page 52 W. A. H. Godley and J. R. Shepherd, ‘Long-term growth and short-term policy’, National Institute Economic Review no. 29, August 1964.

where Et = Desired, or equilibrium, level of employment; Et = Actual level of employment; Qt = Level of output; t is a productivity trend; Ut = Level of registered unemploy ment; Lt = Supply of labour.

note (2) page 53 See W. A. H. Godley and J. R. Shepherd, op. cit. More recent experience of continuously high unemployment levels suggests, however, that over a wider range of variation the unemployment/employment relationship is non-linear (see J. R. Shepherd, ‘Productive potential and the demand for labour’, Economic Trends, August 1968).

note (3) page 53 With k in the system of equations set out in footnote (1) above being given a value of about 0.5 a quarter.

note (4) page 53 The index (O/Ct) is the ratio of actual output to ‘pro ductive potential’ where the latter is defined as the level of output corresponding to an unemployment rate of 1 1/2 per cent (see Appendix I).

note (5) page 53 Since from the above equations, Ut is simply a lagged, smoothed version of Et-Lt.

note (1) page 54 This suggestion is contained in Phillips's original paper.

note (1) page 56 Representing this function in general terms as f(Ut, Pt) and assuming that it is the same for all negotiating groups, we have for the ith group :

where the error terms eit are assumed independent and not serially correlated.

If we write n t/N for the proportion of workers receiving increases in quarter t, changes in the aggregate index become :

where ut is the (weighted) sum of error terms such as eit and the summation is taken over the k groups for whom a new agreement is reached in quarter t.

note (2) page 56 If these conditions were fulfilled, then we could estimate equation (1) in table 1 directly, either by incorporating the fixed value for nt/N into the regression coefficient or by using seasonal constants to remove the variation in nt/N.

note (3) page 56 There is other evidence which supports this last point : (i) Certain agreements are known to cover a large number of workers, and to cause sudden steps in the wage-rate index when they occur. The classic case is the 1963 engineering settlement which covered about 3 million workers and caused a 1.4 per cent rise in the aggregate index between November and December. (ii) The distribution of union membership is skewed heavily in favour of the larger unions : 36 unions (out of about 600) account for 80 per cent of union membership.

note (1) page 57 nt=4,220-2.55.Ut R2=0.02 SE of coefficient 8.5.

note (2) page 57 The R2 and the overall standard error of the equations are slightly better when capacity utilisation (O/C)t is used. The coefficients of O/C are better determined than those for unemployment (U), and their significance is not so sensitive to the introduction of lags (the coefficients of U in equations (6) and (12), for example, are not significant).

note (1) page 59 In no case did the F-ratio for either ΔUt or (O/C)t exceed 3, and in most cases it was lower than 2.

note (1) page 60 Ignoring the constant and the term in nt/N the partitioned form of equation (21) is :

where wt is the ‘equilibrium’ level of wage-rates in quarter t.

note (2) page 60 Apart from the two adjustment equations—(32) and (36) -the F-ratio (square root of the ratio of the coefficient to its standard error) is never given as more than 0.5. (Broadly, an F-ratio of 2.8 indicates that the coefficient is significantly different from 0 at the 10 per cent level, an F-ratio of 4 indicates significance at the 5 per cent level and F-ratios higher than 7 indicate significance at the 1 per cent level.)

note (3) page 60 Its removal results in a sharp drop in the value of R2 from 0.80 to 0.20.

note (1) page 61 Equation (43), for example, can be written : (W+S)t=0.6(0.6wt+0.4wt-1) and in equations (40), (41) and (42) the coefficient of wt-1 is larger and more significant than that of Wt.

note (1) page 63 That is something along the lines of :

note (1) page 64 R2=0.67.

note (2) page 64 R2=0.35 and 0.38.

note (3) page 64 See W. A. H. Godley and C. Gillion, Measuring national product’, National Institute Economic Review no. 27, February 1964. For a similar use of the residual error term see W. A. H. Godley and J. R. Shepherd, ‘Forecasting imports’, National Institute Economic Review no. 33, August 1965.

note (4) page 64 Terms in Nt and Nt-1 are both significant although attempts to introduce Nt-2 and Nt-3 were unsuccessful.

note (1) page 65 In the Survey equations (56) and (57) the coefficients of pt/pt-4 and pt-1/pt-5 are significant at the 10 per cent level but not at the 5 per cent level. By comparison with equation (55), the value of R2 has increased from 0.72 to 0.75, but the size and significance of the unemployment coefficients has been reduced from —0.0071 (0.0019) to −0.0048 (0.0022)—an effect similar to that observed in the earlier wage-rate studies. Since the Survey equations are based on six-monthly changes, the possibility of feed-back makes these results doubtful.

note (2) page 65 Since a coefficient of −1/120 = 0.0083 for ΔU cor responds to a coefficient of 1.0 for E and the remaining part of the coefficient of ΔU, -(0.0145-0.0083)= −0.0062, is of the same magnitude as the coefficient in equation (58).

note (3) page 65 And that the value of R2 should show such a marked increase, from 0.40 in equation (58) to 0.56 in equation (64).

note (4) page 65 Also Ra is again increased—from 0.46 in equation (59) to 0.62.

note (1) page 67 On their data a X2 test rejected the hypothesis that nt/N=a constant.

note (2) page 67 In this study the structural equation is : wt=k+a(pt-Pt-4)+bdt+ut where p is the retail price index, dt is the authors' index of the pressure of demand for labour, and the variables are expressed in logarithms. The estimating equation is : Wt=K+aPt+bDt+Ut where the variables in capital letters denote four-quarter moving averages of the corresponding terms in the structural equation (for example, the price variable P is a four-quarter moving average of quarter on quarter-on-year earlier changes).

note (3) page 67 wit =k+a(pt-pt-4)=bdt+eit or 0 if no agreement is reached in quarter t. The difficulty is that if the eit are assumed to be serially independent, then the moving average Ut must be serially correlated, which immediately throws doubt on the use of ordinary least squares as a method of estimation. Conversely, if Ut is assumed serially independent, then some complicated and implausible relationship is implied among the individual error terms eit.

note (4) page 67 J. Johnston, Econometric Methods’, McGraw Hill 1963, page 216 : auto-correlated disturbances alone do not lead us to expect biased estimates; lagged variables would lead us to expect in this case a negative bias; yet the simultaneous presence of the two complications produces substantial positive bias’. Sargan's comment on this problem is : the only criterion is that the optimum form should have errors which are independent in different time periods’. Colston Papers, 1964.