HOUSING, WAGES AND UK LABOUR MARKETS
| Author | John Muellbauer,Anthony Murphy,Olympia Bover |
| Published date | 01 May 1989 |
| DOI | http://doi.org/10.1111/j.1468-0084.1989.mp51002001.x |
| Date | 01 May 1989 |
OXFORD BULLETIN
of
ECONOMICS and STATISTICS
OXFORD BULLETIN OF ECONOMICS AND STATISTICS, 51,2(1989)
0305-9049 S3.00
HOUSING, WAGES AND UK LABOUR
MARKETS
Olympia Boyer, John Muellbauer and Anthony Murphy
I. INTRODUCTION
Much has been written on why wage inflation is curiously unresponsive to
high rates of unemployment - see for example Lindbeck and Snower (1985)
and Blanchard and Summers (1986). For the UK, Layard and Nickell (1985,
1986) have developed a model for wages, prices and employment to show the
mechanisms at work. In the latest version of this model (Nickell, 1987) the
relative ineffectiveness of high unemployment in curbing real wages is
particularly clearly expressed. First, it is the logarithm of unemployment that
affects the real wage. This means that an extra 100,000 unemployed are less
effective in holding down wage increases the higher is the unemployment
rate Second, the negative effect on wages is substantially offset by the
opposite effect of the proportion of those unemployed for over one year. The
model includes in the (real) wage equation a number of other factors: the
productivity trend, a measure of change in the sectoral structure of employ-
This research was financed under ESRC grant B00220012. We are most grateful to
Stephen Nickell and Paul Kong for access to their data and programmes and their helpful
advice. We received useful comments from Katherine Abraham, Manuel Arellano, Juan
Dolado, John Flemming, Chris Gilbert, David Hendry, Alan Holmans, Gordon Hughes, John
Knight, Richard Layard, Barry McCormick, Patrick Minford, David Newbury, Andrew
Oswald, Graham Reid, Maurice Scott. Peter Spencer, Konrad Stahl, Larry Summers, John
Vickers and Martin Weale. Of these, John Flemming and Alan Holmans deserve special thanks
for their continual helpfulness and the sustained thoroughness of their critique. However,
responsibility for remaining errors is ours. We are also grateful for data or advice thereupon to
Barry Bissett, Forrest Capie, Andrew Evans, Richard Harris and David Taylor.
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Volume 51 March 1989 No. 2
98 BULLETIN
ment, the ratio of benefits to earnings, the union-non union wage mark-up,
employer taxes and the ratio of import prices to domestic prices.
Muellbauer (1986) cautioned that some elements might have been omitted
from the Layard-Nickell story. In particular, it was hypothesized that the
housing market may have important effects on the labour market. There is a
considerable literature on the effects of the imperfections of UK rented
housing markets in restricting labour mobility (Hughes and McCormick,
1981, 1985, Minford et al., 1987) and hence in raising unemployment - see
Hughes and McCormick (1987), and Minford et al. (1987) for a com-
prehensive model.
This paper examines the interaction of labour and housing markets,
including the owner-occupied sector, more generally. Implications are drawn
for the behaviour of aggregate wages in the UK and for the relationship
between aggregate unemployment and unfilled vacancies, which in part
reflects mismatch between jobs and people. Our evidence reveals that lagged
regional house price/earnings differentials play an important role in both
wage and unemployment, vacancies equations and that lagged average house
prices have a significant effect on wages. It is also consistent with cross-section
evidence on the effect of tenure structure on mobility and suggests that
changes in tenure structure and the 1965 and 1974 Rent Acts have had
important implications for labour markets. Altogether, a view of the process
of wage determination emerges from our work that is radically different from
that of Layard and Nickell (1986). Our evidence suggests that changes in
unemployment and in sectoral mismatch are more important for wage
pressure than are levels. This would appear to be consistent with arguments
about the roles of insiders and outsiders in wage determination given by
Blanchard and Summers (1986) and Lindbeck and Snower (1985, 1987).
Section II reviews the theoretical background on aggregate wage deter-
mination in sectoral labour markets. Section III provides evidence on wages
in the UK. Section IV estimates the corresponding unemployment/vacancies
trade-off. Section V summarizes our empirical results, discusses their inter-
pretation and draws conclusions.
II. AGGREGATE WAGES AND SECTORAL LABOUR MARKETS
(a) The Relation Between Wages, Excess Demands and the Dispersion of
Excess Demands
Hansen (1970) discussed the nature of wage adjustments when there are
sectorally distinct labour markets. He concentrated on the response of the
proportional rate of change of nominal wages to excess demands, given other
determinants such as the rate of change of prices and productivity. Layard and
Nickell (1985, 1986) found that for annual data a better formulation of the
dependent variable is the deviation of the log real wage from the productivity
trend. Let us call this variable w and apply Hansen's analysis to it.
00
Fig. 1. The relation between unemployment, vacancies and aggregate excess demand
HOUSING, WAGES AND UK LABOUR MARKETS 99
Suppose that in the ith market
w7 = az + /3x (2.1)
where z is excess demand and x a combination of other factors such as the
wedge between producer and consumer prices and proxies for union push-
fulness. Then in aggregate w*=az+ßx (2.2)
By aggregation over a sectoral distribution of excess labour demands, one can
show, like Hansen, that there exists a relationship between the aggregate z
and aggregate employment u and a, the sectoral dispersion of excess
demands. This is illustrated in Figure 1 which also shows a similar relation-
ship for aggregate unfilled vacancies y defined as the sum of positive excess
demands. Note that reducing sectoral dispersion a brings the u, y curves
closer to their asymptotes. Since z =z(u, a) can be written as a decreasing
concave function of u and an increasing function of a, the aggregate wage
equation (2.2) becomes
waz(u,a)+ßx (2.3)
It has long been suspected (Hansen, 1958 and Hansen, 1970, footnote 8)
that a given amount of positive excess demand exerts greater wage pressure
upwards than the same level of negative excess demand exerts downwards.
This, indeed, is a major concern of the debate about unemployment
hysteresis (Blanchard and Summers, 1986, Nickell, 1987) and is a basic
feature of insider-outsider models of wage determination (Lindbeck and
Snower, 1985, 1987). The relationship of w* to u will then be:
wF(u, a)+ßx (2.4)
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