how inflexible are negotiated wages in britain?

OXFORD BULLETIN OF ECONOMICS AND STATISTICS, 49, 1 (1987)0305-9049 $3.00

HOW INFLEXIBLE ARE NEGOTIAI'EDWAGES IN BRITAIN?

Derek Robinson*

The wages of most employees in Britain are influenced if not completelydetermined by collective bargaining or some other form of institutionalintervention such as wages councils. Examination of the existence andextent of wage flexibility should start by considering the effects ofcollective bargaining on wage movements. Other factors may causeadditional changes in some elements of pay such as individual meritawards or other supplements which are determined or applied unilaterallyby management, but changes in negotiated wage rates are the firstindication of wage flexibility as determined by collective bargaining.There are many different kinds of labour market, characterized by thetype of labour - occupational labour markets - or some spatial orgeographical criteria - local labour markets. While there may be majordifferences among the different kinds of labour markets within a singleeconomy, and significant differences between most markets in oneeconomy and those in another, there seems to be fairly general agree-ment that labour markets in many economies, and especially in the UK,are marked by an absence of downward wage flexibility.

It is believed that observed imbalances between the numbers unem-ployed, representing in some way the supply of labour, and the numberof vacancies, reflecting the unsatisfied demand for labour, are evidencethat the labour market is not in equilibrium. The current high unemploy-ment therefore indicates an excess supply of labour at prevailing wagelevels. If, in the framework of standard economic analysis, the labourmarket operated smoothly, we ought to expect to see wages fall,employment rise and the number of unemployed come roughly intoline with the number of vacancies in local occupational labour markets.There might not be exact correspondence between measured unemploy-ment and vacancies at any point in time due to the inclusion of somevoluntary unemployed in the statistics, frictional unemployment, and,perhaps more seriously for analytical purposes, because of structuralunemployment. Structural unemployment is an ex post concept andpresents considerable problems for the measurement and classificationof those currently unemployed.

* Currently attached to International Labour Office, Geneva.

37

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REAL OR MONEY WAGE FLEXIBILITY?

There may be various reasons why labour markets adjust to reductionsin demand relative to supply through changes in the quantities employedrather than through downward adjustments in the price of labour. Someimplicit contract theories seek to explain this, and other explanationsmay emphasize the importance of trade unions or certain forms oflegislation which maintain minimum wage levels.' The failure of wagesto fall in the face of rising unemployment (an assumed increase in thesupply of labour, although, of course, not for each particular occupationand therefore not affecting each individual labour market to the sameextent) can be interpreted as reasonably convincing evidence that thereis an element of inflexibility in money wages. This should come as nosurprise. Keynes commented on it, and noted the downward stickinessof money wages even during a depression.

There is very little in either the literature or experience to suggestthat downward money wage flexibility occurs in the UK. Even in therecent period of very high unemployment there is little evidence of cutsin money wages per unit of time worked.2 There is some suggestion thatemployees in a few isolated instances may have offered to take a cut inmoney wages in order to maintain their jobs but the paucity of suchcases and the absence of hard data suggest that they are unimportant.Some other workers may have had a fall in total pay as a result of areduction in hours worked. This sometimes seems to have happenedwhere privatisation has led to the transfer of employment from a publicsector organization to a private firm. There may also have been reduc-tions in non-wage benefits such as holidays or sick pay provisions.3

The downward inflexibility of money wages from the same employ-ment does not always apply if the work is transferred to anotheremployer. This may lead to an increase in sub-contracting or thebuying-in of services. Firms may be able to obtain cost reductions inthis way if other firms have lower money wages or unit labour costs.The institutional or other factors in the internal labour market may denythe firm the opportunity to obtain relative cost reductions from withinwhich are available to it from external sources. There is an interestingreversed similarity between this development and the spread of sub-contracting, including an extension of self-employed sub-contractors in

'See Okun (1981) and Mayhew (1983) both of which provide good summaries of differentexplanations and full bibliographies.

2 One example is a reduction of £40 a week in the pay of 600 SOGAT members employedby W. H. Smith in London. The alternative could have been the closure of the London whole-sale operation, and 118 members had accepted voluntary redundancy. See The Times, 21August 1986.

NUPE and NALGO have produced various information sheets for their members givingexamples.

HOW INFLEXIBLE ARE NEGOTIATED WAGES IN BRITAIN? 39

certain occupations then in short supply in the fifties and sixties. Thenthe internal institutional pressures prevented the firms from raising thepay of certain occupations in short supply (Robinson, 1968). Internalpressures for comparability and the maintenance of existing pay differ-entials would have spread any pay increases to other occupations, thusraising excessively the marginal costs of any new recruits attracted bythe higher pay levels for the scarce occupations. Sub-contracting allowedfirms to pay more for the products or services of these occupationswithout generating internal pressures for similar increases from otheroccupations motivated by considerations of equity or fairness. In thecurrent, different, labour market conditions of excess supply, sub-contracting may allow a form of reduction in money wages by the samemeans - the lower money wages occur outside the firm, so by-passingthe internal labour market and avoiding the dislocations and frustrationof expectations of existing employees which might have occurred if theinternal wage structure or levels had been changed. In the earliersituation the expectations were related to the fairness or equity of theinternal pay structure. In current conditions they come from an expecta-tion of fairness which precludes a reduction in money wages for theperformance of the same duties with the same employer.

For the rest, even very high local occupational unemployment seemsnot to have led to a reduction in money wages; in the overwhelmingmajority of cases they have risen. Trade unions have long resistedreductions in money wages. The comparative and competitive natureof much of British collective bargaining and trade union behaviourmeans that any one trade union will be extremely reluctant to accept acut in money wages. Other unions may not follow suit, may take lowercuts, or even obtain increases. Trade union leadership is often judged bycomparison with other unions. Recent changes in industrial relationslegislation requiring periodic elections for members of trade unionexecutive committees may intensify the competitive pressures bothfrom within unions and from other unions if leadership feels undergreater pressure to satisfy members' aspirations. Moreover, when pricesare rising, even constant money wages mean a reduction in real wages.During a depression in which prices are falling, refusal to accept a cutin money wages may indicate money illusion, or it may be a consciousdecision to obtain an increase in real wages. When prices are rising,refusal to accept a reduction in money wages may be an attempt toplace a limit on the extent of reductions in real wages.

Even without trade unions there is little evidence that workers inthe UK are willing to accept reductions in money wages. Such cuts areregarded as a reflection on individual status. Employees feel demeanedas money wages are frequently an indication of relative worth bothwithin the firm or organization and externally by comparison withmoney wages elsewhere. More importantly, perhaps, workers evaluate

40 BULLETIN

the fairness of their money wages and changes in them by reference totheir effort-input. If they are working as hard as previously they do notaccept the fairness of a cut in money wages. For while a reduction inreal wages may be the result of actions external to their firm and sooutside the control of themselves or their employer, a reduction inmoney wages is seen as the result of a decision taken by their employer.This decision may be the result of external pressures but it is neverthe-less an internal decision and one which offends their sense of fairness.They are working at least as hard as previously and they do not believeit right that they should receive less money for doing so. This is onereason why a reduction in total earnings resulting from a reduction inhours worked, although unwelcome, may be acceptable. It does notrepresent a reduction in the rate of pay in relation to effort-input.Fairness is an extremely pervasive influence in British pay determination,and one held by management as well as workers. They may not shareidentical views of fairness, but both regard their own interpretation ofequitable treatment as an important element in the acceptability ofproposed changes. Cuts in money wages go against the value judgmentsof both sides of industry.

Reductions in money wages, even during periods of high unemploy-ment, ought not to be expected in the sort of industrial relations andpersonnel management climates that have developed in Britain, and forthat matter, in a number of other countries. The question of whetherwages display excessive inflexibility should therefore be interpreted asapplying to real wages. This should be the normal formulation of thequestion for those, who, following Friedman, believe that it is real andnot money wages which determine both the supply and demand forlabour. In this context real wages may mean different things to theemployer and the worker. For the employer product real wages are thecrucial variable, so that he is interested in the level of money wages,plus other items of labour costs such as insurance contributions andfringe benefits, in relation to the price he receives or expects to receivefor his products. Workers are interested in the relationship betweentheir money wages (which may be before or after direct taxes - there isno unambiguous evidence on this) and the prices of all those goods andservices which enter, or might enter, into their consumption. Theseprices are usually taken to be those covered by the appropriate RetailPrice Index (RPI). Employers may be interested in this collection ofprices only in so far as they affect the real value of profits or dividends.

FLEXIBILITY OF REAL WAGES

Real wages may change, in either direction, as a result of the interactionof two factors: the change of money wages and the change of prices.


However, unless money wages are determined daily, or as frequently asthe changes in the RPI are recorded, decision to change real wagesthrough alterations to money wages are taken only periodically. Wagebargaining imposes costs on both parties. It involves time and effort andcarries the risk of industrial action which neither of the parties tobargaining may desire. Employers often prefer long-term agreementswhich provide greater certainty in some of their future production costs.Trade unions in the UK are reluctant to make agreements which committhem for too long a period. Inflation and the prevailing general rates ofincreases in money wages may rise, product and labour market conditionsmay alter, productivity and working conditions may change or the needto agree changes in them may arise and these changes will be linked towage changes, and other unions may obtain higher increases in futuresettlements than those provided for in the long-term agreements. Inchanging economic conditions both sides have an interest in developingprocedures which allow money wages to be adjusted from time to time.They may have different interests when it comes to the periodicity ofthe wage reviews, but both of them, in the circumstances experiencedin the UK, seem agreed that the reviews should not occur at very shortintervals. The costs of doing so is regarded as too high. The costs ofadjusting money wages only every two or three years is unacceptableto trade unions operating in a competitive environment and seeking toprotect and advance the interests of their members, and is often toohigh for an employer faced by competitive labour market conditionsand concerned to retain his existing workforce. The usual situation inthe UK is that there is a periodic adjustment of money wages which, inmany but not all cases, takes place at approximately annual intervals.An agreement or understanding that money wages will be reviewed atregular intervals can itself be of advantage to both parties. It reducesthe possibility of industrial disputes over the question of whether wagesshould be reviewed, and allows the parties to concentrate on thequestion of the size of the adjustments.

With rising prices, real wages then decline until the next money wageincrease. With periodic money wage settlements and changing prices,real wages are not and cannot be completely inflexible. Annual moneywage settlements do not determine the level of real wages over the lifeof the settlement unless some form of indexing them to changes in theRPI during the life of the settlement is also agreed. The incidence ofwage-indexing in the UK can be ignored. An assertion that real wagesare inflexible cannot therefore mean that they never fall, for obviouslyif prices are rising, real wages will begin to fall as soon as a money wageincrease is agreed. With money wages rigid downwards, the question ofreal wage rigidity is a question about the size of the increase in moneywages at the periodic settlements, the time between settlements, andthe rate of change of prices between settlements.

oo 120

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Unskilledr'

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1971 72 73 74 75 76 77 78 79 80 81 82 83 84 85

Fig. 1. Monthly Real Wage Index, fitter and unskilled worker

Figure 1 shows the monthly real wage rate index (the weekly wagerate plus the weekly attendance allowance paid if no unauthorisedabsence took place in the week) each month, for a skilled Fitter andUnskilled Worker in a particular engineering company from December1971 to October 1985. The company has a time-based payment systemand there were no payments-by-results in this period. The real wagerate shown is obtained by dividing the index of weekly wage rate plusattendance allowance by the RPI, witl1 both indices based on December1971, the date of a wage settlement. Actual real earnings of an individualmay have changed at a different rate, and at times perhaps in differentdirections, as a result of overtime working, absences, or receipt of shiftpremia. The index is of the real rate of pay for a standard week's work.The real wage rate shown in Figure 1 represents the results of collectivebargaining over basic (in this firm, standard) wage rates and attendanceallowance as modified by inflation. It is the most representative statisticof changes in real wages of Fitters and Unskilled Workers in this firm, asdetermined by collective bargaining, that is available.

While the slope of the general trend may differ from employer toemployer, and the actual rate of change may vary among occupationsfor the same employer in the same plant, British wage development forall occupations and all employers shows one general feature, illustrated

42 BULLETIN

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in this figure. Increases in real wages obtained at the time of an increasein money wages are subsequently reduced by price increases. The nextmoney wage increase may then restore the real wage to the level pertain-ing at the time of the previous increase, may raise it, or may result ina lower real wage than existed at the last settlement.

It would be foolish to assume that trade unions, employers andworkers are unaware of the gradual erosion of real wages betweenmoney wage settlements, although some may have but vague notions ofthe exact extent of the reduction in real wages since the previousincrease. Indexing money wages to the RPI between settlement dateswould maintain their real value between settlements. Neither tradeunions nor employers in Britain display enthusiasm for index-linkedwages. Existing pricing practices favour occasional price increasesrather than a series of more frequent smaller adjustments. Trade unionssuspect that frequent gradual pay adjustments might diminish theirperceived role in obtaining pay increases. Both sides recognise that ifthere were complete wage-price indexing, the periodic wage settlementswould be more difficult. Decreases in real wages would be overt, takingthe form of reductions in money wages. Complete indexation betweensettlements would also focus bargaining at the settlement dates on amore precise relationship between changes in wages and productivity, orsome other variable, and neither side may wish to become involved inthis. The present processes, while entailing the reduction in real wagesbetween settlements if prices rise, provide both parties to bargainingwith opportunities to compromise, explain their decisions to theirconstituents without having to be completely precise about the natureof the compromise settlement, and avoid the imposition of rigid realwages between settlements. The experience of indexed wages from the'threshold' provisions during the Heath Government's income policy of1974 (maintained by the Labour Government until November of thatyear), persuaded employers that indexation speeded up and increasedinflation. At the same time, indexation to limit or reduce the roleof periodic wage settlements, is not, in the UK, seen as a desirablealternative.

Periodic money wage adjustments are not the same as long-termcontracts. An agreement to have annual wage settlements is not, inBritain, a contract. It is an agreement or convention between unionsand employers. The whole set of agreed terms and conditions do notcome to an end at the termination date of the annual settlement.Existing terms and conditions continue unless altered as the result of anew collective agreement. Even in the US where the document agreedbetween a trade union and an employer may be a contract which isenforceable between them as well as binding on the workers covered byit, there is nothing which binds the worker to remain in employmentwith that employer for the life of the contract. Employers can also

44 BULLETIN

increase the money wages above the levels set out in the collectiveagreement or contract. Fixed-term money wage agreements cannotcompletely explain why real wages fall to the extent that they dobetween settlements, for employers always have a variety of means attheir disposal to increase them should they wish. There may be undesiredindustrial relations consequences of doing so as trade unions do not likewage increases which appear to be unilaterally determined by manage-ment, and a negotiated increase between recognised settlement datesmay generate pressures for further additional increases. However, someway of providing additional increases through the processes of collectivebargaining is always available to an astute management.

BREAKEVEN REAL WAGE SETTLEMENTS

A breakeven real wage settlement (BRWS) is one which restores the realwage to the level which existed at the time of the previous settlement.Figure 2 illustrates the monthly real wage of a series of such breakevenreal wage settlements using the Retail Price Index (RPI) for a bargaininggroup with a regular annual settlement date in April of each year from1971 to 1985. Each settlement also restores the real wage to the level

110

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1971 72 73 74 75 76 77 78 79 80 81 82 83 84 85

Fig. 2. Monthly Real Wage Index with breakeven real wage settlements, April1971-85


which existed in April 1971. A perfectly or fully indexed month-to-month constant real wage would be represented by the horizontal lineat 100 on the vertical axis. The difference between this and the actualReal Wage Index (RWI) indicates the real income lost as a result ofprice inflation between settlement dates. The area below the RWI curveshows the actual real wage received in a month expressed in index termswith April 1971 = 100.

Table I shows various measures of money and real wage changesduring the period 1971-85 for this group. The figure of £793 p.a. wasthe pay of a clerical grade in April 1971, although the subsequent payof this group did not follow a BRWS pattern. The BRWS is the level ofmoney wages required at the date of a settlement (m) to restore theirreal value to the level existing at the previous settlement:

BRWSm MW1(RPIm/RPI1) (1)

where MW1 is the level of money wages at the previous settlement, RPImis the Retail Price Index in settlement month m, and RPI1 is the RetailPrice Index in the month of the previous settlement. The BRWS percent-

TABLE 1Break-even Real Wage Settlements RPI April 1971-86

The rates of change and Lost Income are calculated on unrounded figures.

Settlemen tdate(1)

Moneywage£ p.a.(2)

BR WSpercentagechange(3)

AR WIindex(4)

PercentchangeARWI(5)

Lostincome (-)Gainedincome (+)(6)

4/71 793 100.0 - -4/72 844 6.4 99.5 -0.5 - 54/73 921 9.1 98.3 -1.0 -154/74 1,061 15.2 96.1 -2.1 -424/75 1,291 21.7 93.8 -2.3 -844/76 1,535 18.9 96.8 +3.2 -504/77 1,803 17.5 99.6 +2.8 - 64/78 1,946 7.9 99.2 -0.2 -154/79 2,142 10.1 94.5 -4.7 -1244/80 2,608 21.8 98.7 +4.4 -334/81 2,922 12.0 99.2 +0.5 -234/82 3,197 9.4 101.3 +2.1 +414/83 3,325 4.0 100.7 -0.5 +234/84 3,497 5.2 100.8 +0.1 +284/85 3,739 6.9 101.8 +0.9 +664/86 3,851 3.0

46 BULLETIN

age change is the corresponding required percentage increase in moneywages.

Annual Real Wage Income (ARWI) is an index of real wage incomeover a 12-month period. In this table it is the total of 12 monthly realwage index numbers for each April-March settlement year expressed asan index with the annual total for April 1971-March 1972 as the base.

ARWI = rwi (2)

where rwi is the monthly real wage index. An increase in money wageson any date during a month affects the rwi for that month. The Indexof ARWI is:

(ARWI/ARWI0). 100 (3)

where n is the current year, and 0 is the base year.Lost Income (LY) is the amount by which total money income from

wages in the year fell below (-), or Gained Income exceeded (+), thetotal amount of money wages which would have been received in theyear if ARWI in that year had been the same as ARWI in the base year.It is a lump sum representing the difference in the annual money wageincome in the year in question and the annual money wage incomerequired in that year to maintain the real value of the annual moneywage income received in the base year.

LY = [(ARWI/ARWI0). AMW} - AMW (4)

where ARWI is the ARWI for the current year, ARWI0 is the ARWIfor the base year, and AMW is the total annual money wage received inthe current year.

Because it is assumed that money wages change only in April thesettlements in col.(1) in Table 1 are always the same. Column (2)shows the annual salary necessary to restore the money wage in Aprileach year to the level of real pay which existed in April 197 1 (and eachsuccessive April). Column (3) shows the percentage change in moneywages in the April settlement each year needed to obtain a BRWS. Thisis the same as the change in the RPI. Column (4) is an index of AnnualReal Wage Income (ARWI). Column (5) shows the percentage change inthe ARWI from one year to another. For example, ARWI in 1976 (April-1976-March 1977) was 3.2 per cent higher than in 1975 although thiswas still less than the base year of 1971, as can be seen from col. (4).Column (6) shows Lost Income, the total amount of extra money wageswhich would be required over the full year in question to restore theARWI of that year to the level which existed in the base year (1971).In this example it is determined by the rate and monthly incidence ofinflation during the settlement year and the total amount of moneywages received during the current year. In other cases it can also beinfluenced by whether the wage settlement actually was a BRWS, or


whether it resulted in the RWI at the time of the settlement beinghigher or lower than at the base date. The positive entry for Lost Incomein the years 1982-84 indicates that the restoration of real wages to thelevel which existed at the time of the previous settlement would havegiven a higher annual real wage income over the coming settlement yearthan was received in the base period April 1971-March 1972. The choiceof a different base year would change the amount of Lost Income ineach year. If April 1975-March 1976 was selected, Lost Income wouldbe positive each year (i.e. Gained Income) as the ARWI index in 1975was at its lowest. If April 1982-March 1983 was selected, Lost Incomewould be higher in every year.

In the absence of arrangements for indexing wages to a retail priceindex with full compensation on a month-to-month basis, the restorationof the RWI to the level of the previous settlement is the form of break-even real wages most likely to conform to bargainers' acceptance of thenotion of constant real wages. Obviously it does not provide constantreal wages as inflation between settlement dates causes the real wage tofall. A series of breakeven real wage settlements does not, and cannot,provide real wage inflexibility through time. Only complete monthlyprice indexing can do that. However, a series of breakeven real wagesettlements might be a bargainers' attempt to provide one version ofconstant or inflexible real wages. It may not be considered a veryrational response as both sides of the bargaining table are aware thatsubsequent inflation will reduce real wages between settlement datesand that the greater the rate of inflation between settlements the largerthe loss. Neither side may expect the rate of inflation over the forth-coming settlement year to be the same as that over the past year. Evenif they agree a BRWS, both parties may expect ARWI to change in thecoming year, but there is no necessary reason why both sides shouldexpect ARWI to move at the same rate, or even in the same direction.A BRWS avoids the need for the parties to agree on the expected orforecasted rate of inflation. It may be that many bargainers adoptsomething like this approach. More importantly, perhaps, it may beregarded by many trade union members as evidence that their bargainershave made good the effects of inflation on their money wages. Withexisting practices and attitudes, this may be the first requirement ofunion negotiators or others such as arbitrators who are responsible fordetermining money wages levels. It may not coincide with notions ofeconomic rationality, but may nevertheless be a widely held view.

There are other possible responses. Bargainers could increase realwages at each settlement above the level which existed at the date ofthe previous settlement, anticipating some future rate of inflation, andproviding an element of compensation so that some of the erosion ofreal wages in the period since the last settlement would be offset for atime by higher real wages under the new settlement. Some expected

48 BULLETIN

rate of inflation would then reduce the future level of real wages belowthe level which existed at the date of the settlement, and this wouldrequire a similar form of compensation by raising the level of real wagesat the next settlement date. The parties to collective bargaining would,on this approach, adopt some form of averaging of the real wage levelover the period of a settlement and use a combination of compensationfor past inflation and anticipation of future inflation to determine thesize of the money wage increase at each settlement. The values of ARWIare the result of averaging real wages over 12 months. Comparison ofthe ARWI from one year to another shows the extent to which realincome over the settlement year has maintained or changed its value inrelation to real income in some previous settlement year. It does notfollow that the bargainers intended that ARWI should move as it did.However, if their bargaining objective was to maintain a constant realwage, defined as a constant ARWI, rather than a constant monthly RWIobtained by full indexing, variations in ARWI would be the result of amixture of errors in the rates of anticipated and actual inflation, andany compensation included in the last wage settlement for past mistakes.However, we seldom know the objectives of wage bargainers. We mayoccasionally obtain some insight in arbitration cases when argumentsand objectives are stated publicly and with rather more precision thanis the case in bargaining, but even here it is not always clear that thestated detailed objectives are actually what either party wants, or,perhaps more relevantly, is prepared to accept for the time being in theprevailing circumstances.

While there is no reason to believe that those involved in collectivebargaining in Britain seek to obtain mutual agreement on the rate ofchange of average real wages over the settlement year, i.e. on ARWI -if they did they ought to go for full indexing between settlements -changes in ARWI provide the best indication of whether the outcomeof pay determination and the subsequent movement in prices duringthe rest of the settlement year produce real wage flexibility or rigidity.Examination of the RWI at settlement dates, as we have seen, does notprovide sufficient evidence as it ignores 11 out of every 12 months. TheARWI provides an alternative measurement of real wage flexibility -one that looks at real pay over the full settlement year rather than onlyin the months of settlement and adds a time dimension to the conceptof breakeven real wages (Robinson, 1961 and 1963; a similar concept isused in Harvey and Hemming, 1983).

SELECTION OF PRICE INDEX

In addition to the RPI there is the Tax and Price Index (TPI) introducedby the Conservative Government, with data provided from January


1976. This seeks to include the effects of changes in direct and indirecttaxation in the cost of living thereby measuring changes in real disposableincomes. The two indices do not move at the same rate, or even neces-sarily in the same direction. The size of the money wage increase neededto obtain a breakeven wage settlement will therefore depend on whichprice index is used.

Despite the Government's intention when the TPI was introduced,the index has not attracted much support and appears not to be usedby bargainers. The TUC has an official stance of ignoring the index'sexistence. For our purposes the subsequent analysis will be based onthe RPI to reflect wage bargainers' behaviour to the extent that they dobase their actions on movements in a price index.

MOVEMENT IN REAL WAGES

Calculation of ARWI requires a money wage figure for each monthcovered by the analysis. For this reason calculations cannot be madeusing annual data from the New Earnings Survey or similar sources.The concept of ARWI is not appropriate for application to averages ofearnings or wage rates as individual variance within the overall averagewill lead to different ARWI. It is necessary to know the precise monthof each change in wages to calculate ARWI and this may differ foroccupations or groups within a large amalgam of workers. The conceptis therefore most usefully applied to a single occupation. A majordifficulty is the collection of a time-series of data showing the levels andexact dates of change of money wages. In some instances it is possibleto obtain basic wage rates. However, such rates may be augmented byvarious plant or company-based additions, allowances or bonuses,information on which is often difficult to obtain on a monthly basis.

Table 2 shows real pay for various occupations from 1979. Theoccupations shown are those for which details of negotiated wage ratescould be obtained. The figures for wage and salary rates are taken fromIncomes Data Services Reports, the occupations being confined tothose for which details of negotiated wage rates could be obtained.Most of the occupations chosen are those which have the lowest wagerates in their collective agreement for either manual or white-collaroccupations. These lowest paid occupations are the lower-skill occupa-tions in each agreement, and so may be those for which the excesssupply of labour is greater so implying that greater downward real wageflexibility might be observed. In a few cases details of two occupationsfrom the same agreement are given to illustrate the effects of changesin internal differentials. The occupations shown in Table 2 are notpresented as a representative sample of all occupations. They areexamples intended to illustrate changes in real wages that have takenplace among a range of occupations.

50 BULLETIN

Column (1) gives the identification number of the occupation andemploying firm. Column (2) shows the level of money wages for thatoccupation in 1979. Occupations are grouped by what is taken as themonth from which their ARWI year is calculated. Columns (3)-(8)show the annual percentage change in the RWI using the RPI. Columns(9)-( 14) show the annual percentage changes in the ARWI and cols(15)-(20) the Lost Income (-) or Gained Income (+) in each settlementyear compared to the ARWI of that occupation in the settlement year1979-80.

The calculations of ARWI and Lost Income have adopted the con-vention of applying an increase in money wages received at any timeduring a month to the whole of that month so that the higher moneywage is assumed to apply from the first of the month. The amounts ofLost Income should not be regarded as accurate to the last pound.5Nevertheless, as indicators of the cost to employees of flexibility ofreal wage income over the year in relation to the level in 1979-80, theyare as good indicators as are available.

Details of changes in RWI for six years are provided for 2 1 groups,and for five years for ten groups.6 Of the 3 1 occupations included inTable 2, none achieved a BRWS in each year for which information isavailable. Three of the 2 1 groups with six years' data, and one of theother 11 groups with five years' data, experienced a negative percentagechange in RWI in only one of the years. However, five of the 21 failedto achieve a BRWS in four of the six years, and one of them (group 26)recorded a positive increase in RWI in only one of the six years.

Failure to achieve a BRWS does not necessarily mean that ARWI willfall. This also depends on the relative rates of inflation in the two years.There are 17 groups for which ARWI for six years is available; two ofthem had reductions in four of the six years, five had reductions inthree years, four in two years, and five in only one year. Group 19

Some occupations changed their date of settlement during the period. This is indicated inthe footnotes to Table 2. Such a change will affect the starting month for the settlement year.In Table 2, the month which now seems to have emerged as the usual settlement month hasbeen taken as the start of the settlement year. However, where this has changed over the periodthe rates of change of RWI and ARWI will be affected, as will Lost Income. For example, if agroup changed from a regular settlement month of January to June in say, 1982, the 1979-80ARWI based on a June-May settlement year will give it a relatively lower ARWI base than if ithad always settled in June.

The calculations of ARWI and LY have adopted the convention of applying an increase inmoney wages received at any time during a month to the whole of that month so that thehigher money wage is assumed to apply from the first of the month. In some cases the moneywages on which the calculations are based refer only to the basic rates of pay. Bonuses or otherforms of additions to the basic rates may have been obtained or some items may have beenconsolidated into the basic rates. The actual amount of Lost Income may have been higher (asmay Gained Income) than indicated if effective rates of pay have changed exactly in line withbasic rate.

Changes in ARWI and LY cannot be calculated for some of the 1985 settlements as thesettlement year is not yet over.

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3755

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utch

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ssis

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Jan

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Jul

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anua

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nd J

une

1985

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Nov

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b) N

ET

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rade

10.

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Jan

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incl

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g 19

85 a

nd J

une

and

Nov

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r 19

85.

Dew

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t (B

utch

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cher

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ssis

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reas

es in

Feb

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clud

ing

1984

, als

o A

ugus

t 198

4 an

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nuar

y 19

85.

Hon

eyw

ell L

abou

rer,

Bas

ic w

age.

Inc

reas

e in

Sep

tem

ber

1979

and

Mar

ch th

erea

fter

. Thi

s w

ill a

ffec

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bas

e ye

ar M

arch

197

9-Fe

brua

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980

and

give

a h

ighe

r am

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of

Gai

ned

Inco

me

on s

ubse

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rs.

6B

ritis

h H

ome

Stor

es, C

lean

ers

incr

ease

s in

May

and

Oct

ober

197

9, A

pril

1980

to 1

983,

Oct

ober

198

3, A

pril

1984

and

Mar

ch 1

985.

Gua

rdia

n R

oyal

Exc

hang

e, U

nski

lled

mai

nten

ance

wor

ker,

min

imum

. Inc

reas

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Jul

y 19

79, J

anua

ry a

nd J

uly

1980

, Jan

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198

1 to

198

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dA

pril

ther

eaft

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ittle

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Jun

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79, M

arch

and

Jun

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198

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1982

, Apr

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and

1980

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reaf

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Inc

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198

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ay 1

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and

1985

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ase

in A

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1984

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(a)

Lon

don

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o, F

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rk. T

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197

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as J

une,

and

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ay e

ach

year

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on

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(a).

(e)

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197

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as in

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t May

. Thi

s w

ill d

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ase

the

base

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r M

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sub

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Rat

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and

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198

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acc

ount

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alcu

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RW

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tex

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e ch

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on

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RW

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the

Oct

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is.

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etal

Box

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ual G

rade

1.

27T

hom

as C

ook,

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Min

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Inc

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ovem

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1979

-81,

Mar

ch, A

pril

and

Nov

embe

r 19

84.

54 BULLETIN

increased its ARWI in each of the six years even though it failed toachieve a BRWS in two years. Failure to achieve a BRWS in the secondyear or subsequent years does not necessarily lead to a reduction inARWI any more than the attainment of a positive increase in RWIensures an increase in ARWI. The ensuing rate of inflation followinga wage settlement is relevant.

Because it is calculated from a given base year, Lost Income in anyparticular year is influenced by each change in RWI and the rate ofinflation in each year from the base year to the year in question. Anegative change in RWI can nevertheless lead to Gained Income depend-ing on the cumulative changes in RWI and the rate of inflation since thebase year. A positive RWI can lead to Lost Income. Four of the 17groups had Lost Income in each of the six years, and one other groupexperienced Lost Income in each of the five years for which informationis available. On the other hand, three of the 17 groups, and three of theothers, had no Lost Income in any year. These results are sensitive tothe base year chosen. A sizeable decline in ARWI in the first year of theperiod generally means that Lost Income will be experienced throughoutthe period: the initial reduction in ARWI is too much to make up.

Table 3 summarizes the results from Table 2 by showing the numberof negative, positive, or no changes, in RWI and ARWI, each year from1980 to 1985. Lost, Gained or no changes in Income are also shown.The reductions in RWI occurred much more at the beginning of theperiod. This is what one might expect. Increases in unemployment andworsening economic conditions led to reductions in negotiated realwage settlements. However, because of the changing rate of inflation,ARWI and Lost Income did not necessarily fall immediately the down-ward trend in RWI settlements occurred. In 1982 a second round ofnegative RWI settlements led to widespread reductions in ARWI. The

TABLE 3Summary of Changes in R WI, AR WI, and Lost Income

Sign of percentagechange ofRWI

Sign of percentage Lost () andchange of AR WI gained (+) income

- O + Total O + Total O + Total

1980 23 8 31 11 1 19 31 11 1 19 311981 22 1 8 31 23 8 31 24 7 311982 23 8 31 10 1 20 31 19 12 311983 1 1 29 31 2 1 28 31 12 19 311984 3 2 26 31 5 1 25 31 12 19 311985 10 11 21 5 1 11 17 6 1 10 17


cumulative effect of the settlements over the two years was to increasesharply the number of groups experiencing Lost Income in 1982.

In 1983 and 1984 there were relatively few wage settlements whichled to reductions in RWI; most groups obtained at least a BRWS. Therewere far fewer reductions in ARWI, but by 1984 rather more than athird of the groups still had lower real incomes than they had in 1979.

CONCLUSIONS

The analysis of real wage behaviour, and the extent of real wage flexi-bility, can be clarified by means of various concepts: the breakeven realwage settlement (BRWS), which restores the real wage to the level whichexisted at the time of the previous settlement; the actual monthly realwage index (rwi); the annual real wage income (ARWI), which averagesrwi over 12 months; and lost income (LY), being the amount by whichmoney wages over the year fell below the total amount of money wageswhich would have been received if ARWI in that year had been thesame as ARWI in the base year.

Wage settlements that result in negative percentage changes in RWI andfail to provide even a BRWS, although difficult to achieve, have occurredin the 1980's and are the established method by which reductions inreal wages take place in a system of wage determination dominated bycollective bargaining. As we have seen, relatively few of the groupsexamined experienced reductions in RWI regularly over this period.However, even though early reductions in RWI were followed bypositive increases in RWI in later wage settlements, many of these wereinsufficient to restore rwi and ARWI to the levels prevailing in the baseyear. Thus real wages, and presumably product real wages, were lowerthan in 1979. Some of the lower product real wages, indicated by thenumber and amounts of Lost Income in 1983 and 1984, were sustained.More than a third of the groups were worse off in 1984 than in 1979.To this extent they have shared, although not so dramatically, in thehardship experienced by the unemployed.

Many of the employed have borne some of the burdens of adjustmentand their wages have been flexible downwards. The data reveal thatthere has also been flexibility in external relativities as different groupshave undergone different experiences, and, on occasions, flexibility ininternal differentials.

Even failure to obtain a BRWS can lead to an increase in ARWI if therate of inflation is falling. Wage bargainers, and especially trade unions,should give as much attention to policies which will influence futurerates of inflation as they do to past inflation rates and the BRWS. Inthis regard an effective prices and incomes policy may well offerpossibilities for improvements in ARWI which are greater than thoseapparently resulting from negotiated wage settlements and the changes

56 BULLETIN

in RWI, and do so with lower rates of unemployment than are currentlyexperienced.

Policies seeking to increase employment, or modify the rise inunemployment, by reductions in product real wages, may contain twofeatures which impose limits on the policy's usefulness as a longer termmeasure. First, the collective bargaining system, buttressed by theattitudes on both sides of industry, is unwilling or, perhaps, nowunable, to continue to produce negative percentage changes in RWI.After a few settlements it seems that increases have to be in excess ofthe BRWS level. Second, the initial reduction in money wage and RWIin wage settlements contributes to the reduction in the rate of inflationso that ARWI falls by less than RWI at the last settlement. A sustainedreduction in product real wages in incompatible with a restoration orgrowth of ARWI. There is relatively less reduction in product realwages, measured by the yearly growth in ARWI, than would occur ifinflation had not been reduced. This is perhaps inevitable, and from asocial or general view, desirable. While a reduction in product realwages may lead to an expansion of employment it is preferable thatthis should not occur through larger increases in prices.

The decline in RWI and ARWI observed at the beginning of theperiod did not, generally, continue, but the maintenance of some ofthe early decreases, even if at a diminishing level, indicates that the wellestablished bargaining practices and expectations built up in times oflower unemployment have been considerably modified in the last fewyears. However, it does not follow that these modifications will survivea reduction in the prevailing levels of unemployment. Further reduc-tions in the RWI might require substantial increases in the level ofunemployment.

The amount of downward wage flexibility required for marketclearing is, of course, unknown. Employers may claim that there hasnot been enough and workers that there has been too much. Unlesswe assert that the correct amount is that which would lead to somearbitrarily determined specified level of measured unemployment (withall the defects and deficiencies that are now present in British unem-ployment statistics), we cannot arbitrate this dispute. What we can say isthat there has been some flexibility, and that it seems to be increasinglydifficult to continue to obtain additional downward flexibility insuccessive wage settlements. The institutions and attitudes which formpart of our collective bargaining processes maintain inhibitions aboutcertain forms of downward wage flexibility, and seem to impose limitson the extent of downward movement in real wages in successivesettlements. But they are responsible for only part of the developmentof real wages as measured by ARWI. Once the wage settlement isconcluded, ARWI is determined by price movements. The only wayunions can seek to influence these is by discussion with government.

HOW INFLEXIBLE ARE NEGOTIATED WAGES IN BRITAIN 57

Institute of Economics and Statistics, Oxford.

Date of Receipt of Final Manuscript: October 1986

REFERENCES

Harvey, R. and Hemming, S. (1983). 'Inflation, Pensioner Living Standards andPoverty', Oxford Bulletin of Economics and Statistics, Vol. 45, No. 2.

Keynes, J. M. (1936). The General Theory of Employment, Interest and Money,London, Macmillan.

Mayhew, K. (1983). Trade Unions and the Labour Market, Oxford, Martin Robert-son.

Okun, A. M. (1981). Prices and Quantities: A Microeconomic Analysis, Oxford,Blackwell.

Robinson, D. (1961). 'Wage-rate Differentials Over Time', Oxford Bulletin ofEconomics and Statistics, Vol. 23, No. 4.

Robinson, D. (1963). 'Wage Rates, Wage Income and Wages Policy', Oxford Bulletinof Economics and Statistics, Vol. 25, No. 1.

Robinson, D. (1968). Wage Drift, Fringe Benefits and Manpower Distribution,Paris, OECD.

how inflexible are negotiated wages in britain?

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