COMPETITION AND WORKPLACE WAGE DETERMINATION
| Published date | 01 August 1983 |
| Author | Peter Nolan,William Brown |
| DOI | http://doi.org/10.1111/j.1468-0084.1983.mp45003003.x |
| Date | 01 August 1983 |
COMPETITION AND WORKPLACE WAGE
DETERMINATION
Peter Nolan and William Brown*
Empirical research has demonstrated that occupational wage levels vary
significantly between firms within spatially well defined labour
markets. The evidence, moreover, is consistent for a number of different
countries (Brown et al., 1980). It has also been shown that intra-
occupational wage differentials tend to persist over long periods and
that some firms offer consistently higher wages than others even though
they draw upon the same occupational labour markets (MacKay et al.,
1971). Until quite recently, neo-classical economists attempted to
rationalize these observations within an equilibrium framework, point-
ing to a range of potential compensating variables which tend to offset
earnings differentials between firms. In the spirit of Marshall it was
argued that 'net advantages' and not wage levels are equalized by the
forces of atomistic competition on the side of labour supply.
A different perspective, emphasizing the role of institutional processes
in generating and maintaining inter-firm (or establishment) differentials,
has been advanced on the basis of disaggregate wage data from different
labour market contexts both in Britain and the United States (Dunlop,
1957; Reynolds, 1952; Masters, 1967; Robinson, 1970; MacKay et al.,
1971; Brown and Sisson, 1975). These writers have identified a number
of institutional forces, both on the demand and supply side, which tend
to impart rigidities to the wage adjustment process. For the most part,
however, their work has been ignored by mainstream analysts who have
continued to search for a consistent 'choice theoretic' rationale of
observable intra-occupational wage structures. In recent years this
search has culminated in the development of temporary disequilibrium
wage adjustment models (Phelps, 1971; Pissarides, 1976; Eaton and
Watts, 1977). Within this framework, observable wage outcomes are
rationalized in terms of the market conditions in which transactions are
effected; specifically in terms of the amount and quality of information
available to transactors.
In this paper we shall argue, against this approach, that wage out-
comes cannot be adequately explained in terms of market conditions
* The authors are grateful to colleagues at Warwick University, especially David Deaton; and
to Sir Henry Phelps Brown, Professor A. J. Brown, Roger Tarling and the Editors for helpful
comments on an earlier draft. Thanks also to the participants in seminars at the National
Institute of Economic and Social Research and the Universities of Keele, Liverpool, and
Queen's, Belfast.
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270 BULLETIN
alone; an examination of intra-organizational processes is essential to a
proper understanding of wage setting. It is argued that this is heavily
influenced by relations other than those typically identified with the
exchange process. An empirical study of wage adjustments in a local
labour market in the West Midlands of England is used to illustrate the
relationship between social and institutional processes within the firm
on the one hand and market wage outcomes on the other. The paper,
which has three parts, examines the structure of temporary disequili-
brium models of the labour market; the observed wage experience of
seven occupations in 25 factories over a period of ten years; and,
finally, some implications of the empirical study for labour market
analysis.
LOCAL LABOUR MARKET WAGE STRUCTURES AND TEMPORARY DISEQUILIBRIUM
ANALYSIS
In recent years a growing appreciation of the limitations of conventional
price theory, notably its failure to offer a plausible economic rationali-
zation of the price adjustment process, has led to the development of a
class of models in which individual market participants are explicitly
identified as price and wage makers. Thus unlike earlier Walrasian
analysis this literature accepts, as its theoretical point of departure, that
the process of exchange is highly decentralized and uncoordinated and
that the costs of acquiring relevant wage and price information are
significantly non-zero. This raises the possibility that goods and services
will be exchanged at non-equilibrium prices and that markets may not
always clear.
In the context of the labour market this departure from the theoreti-
cal terrain of Wairasian perfect markets has greatly enhanced the
predictive power of micro-economic theory. In particular, the problem
of accounting for the existence of wage dispersion in well defined
occupational labour markets rapidly disappears. Since individuals have
to carry out their own search for acceptable terms of trade it is assumed
that information on the existing distribution of wage offers can be
acquired most effectively by specializing in 'off-the-job' search. mdi-
viduals will only be prepared to forego earnings from current employ-
ment, however, if a net gain from additional job (wage) search is
anticipated. Given the plausible conjecture that the returns to search
diminish as the number of firms sampled increases, it is highly improb-
able that the entire set of wage offers will be identified. Hence local
labour markets will typically support a distribution of wage offers in
each specific occupational category.
A different set of market outcomes can thus be derived from basic
micro-economic postulates by assuming that the exchange process is
characterized by imperfect information. These models, however, while
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