UNEMPLOYMENT, DURATION AND WAGE DETERMINATION IN THE UK: EVIDENCE FROM THE FES 1980–86
| Author | R. C. Bladen‐Hovell,E. J. Symons,D. H. Blackaby |
| Date | 01 November 1991 |
| DOI | http://doi.org/10.1111/j.1468-0084.1991.mp53004003.x |
| Published date | 01 November 1991 |
OXFORD BULLETIN OF ECONOMICS AND STATISTICS, 53, 4(1991)
0305-9049 $3.00
UNEMPLOYMENT, DURATION AND WAGE
DETERMINATION IN THE UK:
EVIDENCE FROM THE FES 1980-86
D. H. Blackaby, R. C. Bladen -Hovel! andE. J. Symons*
The apparent failure of money wages to respond to the historically high levels
of unemployment experienced during the 1980's has once again directed
attention towards the role commonly ascribed to unemployment in wage
determination. The conventional wisdom suggests that an inverse rela-
tionship exists between the rate of money wage inflation and unemployment,
the latter interpreted as a proxy measure for excess supply in the labour
market. However, as the 1980's progressed it became increasingly clear that
this relationship had weakened significantly and that the disinflationary
pressure that prevailed in the early 1980's had eased considerably despite the
continuation of high levels of unemployment in the UK. Indeed recent UK
experience, with wage inflation once again beginning to accelerate, is notable
in one particular respect; the acceleration is taking place at levels of
unemployment that remain far in excess of those experienced for most of the
post war period.
Whilst explanations for downward inflexibility of wages have varied, most
have tended to concentrate upon factors reflecting the deficiencies of
aggregate unemployment as a measure of excess supply within the labour
market. A prominent example of this approach is associated with the work of
Layard and Nickell (1985, 1986, 1987) and, in particular, with the proposi-
tion that the long-term unemployed represent a less effective component of
the pool of unemployed workers than do their short-term counterparts. From
this perspective the experience of the 1980's would become somewhat easier
to explain given the evidence that the period has been associated with a
reduced outflow from unemployment and a concomitant increase in the
average length of unemployment duration in the UK.
To date, evidence of the unemployment-wage relationship for the United
Kingdom has relied primarily upon the results of time-series studies.
Comparable results from an analysis of cross-section are relatively harder to
*The authors would like to thank the Department of Employment for permission to use the
FES and for supplying the regional unemployment series. Martyn Andrews, Mike Artis, Derek
Leslie and Andrew Oswald supplied useful comments on an earlier draft of this paper. The
usual disclaimer applies.
377
378 BULLETIN
come by, most notably because of the almost complete absence of informa-
tion regarding the regional variation of prices across the country. To the
extent that economic theory suggests that labour behaviour is determined by
fluctuations in the real wage, empirical estimates based upon the money
wage-unemployment response are likely to mis-specify the underlying rela-
tionship.
The purpose of this paper is two-fold. First, it is designed to present
further evidence on the role of unemployment and its duration in wage
determination. However, unlike the majority of studies available for the
United Kingdom, the evidence reported here is based upon an investigation
of a data set constructed by combining information on the hourly wage and
labour market characteristics of approximately 25,500 male employees
covered by the Family Expenditure Survey over the period 1980-86.
Secondly, the study highlights the significant role that regional price variation
appears to play for wage determination in general and the relationship
between wages and unemployment in particular. Indeed, regional price
variation is shown to be sufficiently important that, even when regional fixed
effects are taken into account, the price effect remains significant.
L BACKGROUND
Unemployment has long been recognized as a potentially moderating
influence in wage determination. The orthodox view, variously expressed in
the literature, typically treats unemployment as a proxy measure for excess
supply in the labour market and associates higher levels of unemployment, or
the threat thereof, with an increasing degree of disinflationary pressure.
Moreover, the relationship is generally described as non-linear; a result
stemming from both the asymmetric response of unemployment to move-
ments in excess supply together with the familiar problem arising from
aggregating micro labour market behaviour to the macro level. The latter
point, in particular, is spelt out in some detail by Nickell(1987).
Within this framework the role of unemployment duration is generally
small and, where recognized, typically acts to reinforce the general dis-
inflationary effects of unemployment itself. An illustration of this can be
found in simple models of labour market behaviour based upon the principle
of search. Here increased unemployment duration is occasionally associated
with a tendency for unemployed workers to revise down their estimate of the
reservation wage and thereby enhance their prospects of leaving unemploy-
ment.' However, the suggestion that longer spells of unemployment should
lead to an unambiguous increase in the probability of finding a job has been
challenged on a number of grounds. In particular the implicit assumption that
unemployed workers remain unaffected by the unemployment experience is
contrasted with the presumption of human capital theory whereby unemploy-
For a useful survey of the job search literature, see Pissarides (1985).
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