Radical labor market reforms were initiated in the United Kingdom in the early 1980s. These reforms included legislation to curb industrial disputes and measures to decentralize wage bargaining. This paper evaluates the impact of these reforms on the growth of labor productivity, the responsiveness of employment to variations in output, the rate of wage inflation, and the trade-off between wage inflation and unemployment. The effects of the reforms on the aggregate economy and on the manufacturing sector are analyzed separately. The manufacturing sector is of particular interest as the legislation concerning unions had the most direct impact in manufacturing--where unions have traditionally had a stronger presence--than in other sectors.
The labor market reforms resulted in a significant increase in the rate of growth of labor productivity in manufacturing, but not in the aggregate economy. This paper argues that the increase in the growth rate of manufacturing productivity after 1980, as well as the improved speed of labor adjustment to variations in output, can be attributed largely to the success of the reforms in reducing industrial disputes and removing a number of structural impediments in the labor market.
However, the labor market reforms did not succeed in moderating real wage growth or improving the trade-off between wage inflation and unemployment. This is attributed to two main factors. First, unlike a fully market-based system, a decentralized wage-bargaining system with unions is unlikely to produce wage moderation. Second, when relative wage comparisons are an important part of the bargaining norms, decentralized bargaining may prove more inflationary than a system with some implicit coordination. Both standard econometric techniques and recent developments in labor market theory are used to support these arguments.