Summary of WP/94/152: “Shocks and Structural Breaks: Labor Market Reforms in the United Kingdom”

Authors of Working Papers are normally staff members of the Fund or consultants, although on occasion outside authors may collaborate with a staff member in writing a paper. The views expressed in the Working Papers or their summaries are, however, those of the authors and should not necessarily be interpreted as representing the views of the Fund. Copies of individual Working Papers and information on subscriptions to the annual series of Working Papers may be obtained from IMF Publication Services, International Monetary Fund, 700 19th Street, Washington, D.C. 20431. Telephone: (202) 623-7430 Telefax: (202) 623-7201 This compilation of summaries of Working Papers released during July-December 1994 is being issued as a part of the Working Paper series. It is designed to provide the reader with an overview of the research work performed by the staff during the period.

Abstract

Authors of Working Papers are normally staff members of the Fund or consultants, although on occasion outside authors may collaborate with a staff member in writing a paper. The views expressed in the Working Papers or their summaries are, however, those of the authors and should not necessarily be interpreted as representing the views of the Fund. Copies of individual Working Papers and information on subscriptions to the annual series of Working Papers may be obtained from IMF Publication Services, International Monetary Fund, 700 19th Street, Washington, D.C. 20431. Telephone: (202) 623-7430 Telefax: (202) 623-7201 This compilation of summaries of Working Papers released during July-December 1994 is being issued as a part of the Working Paper series. It is designed to provide the reader with an overview of the research work performed by the staff during the period.

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.

Working Paper Summaries (WP/94/77 - WP/94/147)
Author: International Monetary Fund