Date01 August 1978
Published date01 August 1978
By R. F. ELLIOTT and A. J. H. DEAN
Models of wage determination seek to explain movements in indices of earnings
or wage rates by reference to certain economic or institutional variables. Changes
in wage rates, reflecting wage settlements resulting from negotiations between
employers and unions, have tended to be the main focus of those interested in the
outcome of collective bargaining since earnings (which include payments for over-
time, shiftworking, bonuses and paymentsby-results schemes) also reflect
changes in both the quality and quantity of labour input. For this reason those
studies concerned with wage inflation have tended to concentrate on changes in the
price of standard labour input--changes in the wage rate. However, if the official
index of wage rates is used as a dependent variable, it will serve as only a very
rough approximation to the actual level of settlements the models seek to
The seminal studies of wage inflation by Phillips (1958), Lipsey (1962), Hines
(1964), Parkin (1970) and Lipsey and Parkin (1970) all employed the official wage
rates index. In the following article we discuss a number of problems associated
with the use of this series which is published each month in the Department of
Employment Gazette. In particular we explain why the index provides only a
rough guide to the level of wage settlements in any period and we detail a number of
problems arising from the development of workplace bargaining in certain areas of
the economy. Taken together these limitations cast considerable doubt on the
appropriateness of using the index in models of wage inflation.'
The purpose of this article is to call these problems to the attention of econo-
mists and other users and to propose certain improvements. We suggest that the
index provides a useful indicator of movements in the wages bill that arise as a
result of national negotiations, but that to perform this task with greater accuracy
it needs more frequent and comprehensive rebasing and reweighting. The appro-
priate measure for analysing the determination of wages is not a wage rates index
but a series which indicates the size of wage settlements which have been imple-
mented. The construction of such a series is to be the subject of a second article2,
but we first describe the present index and see whether it is possible to use it as a
measure of wage settlements.
* The authors would like to thank officials of the Department of Employment for their help
in explaining the details of the official wage rates index, They are also grateful to Orley
Ashenfelter, John Creedy, Peter Hart, Ken Mayhew, John Pencavel, Sig Prais and Bob Steele
for their assistance and their comments on an earlier draft. However, the opinions expressed
in the article and any errors that remain are the sole responsibility of the authors.
The Department of Employment points out most of these limitations in its Gazette, but
they have perhaps not always been fully appreciated by the users of the index.
2 See Elliott and Shelton (1978). 249

To continue reading

Request your trial

VLEX uses login cookies to provide you with a better browsing experience. If you click on 'Accept' or continue browsing this site we consider that you accept our cookie policy. ACCEPT