Institutions and Wage Formation in the New Europe

Institutions and Wage Formation in the New Europe

Edited by Gabriel Fagan, Francesco Paolo Mongelli and Julian Morgan

Institutions and Wage Formation in the New Europe addresses the role played by institutions in European wage formation with a focus on EMU and institutional change in labour markets.

Chapter 9: Wage flexibility in Britain: Some micro and macro evidence

Mark E. Schweitzer

Subjects: social policy and sociology, labour policy

Extract

Mark E. Schweitzer* INTRODUCTION The flexibility of wages is a commonly cited reason for weaker inflation pressures in the 1990s, but the concept is generally left imprecise. Notably the microeconomic and macroeconomic concepts of wage flexibility are very distinct, though potentially related. Macroeconomic flexibility is conventionally defined as a larger wage response for a given unemployment rate in a Phillips curve, based on the elimination of factors contributing to sluggish wage adjustment (like micro-level wage rigidities). Microeconomic flexibility is conventionally defined as a lack of evidence for wage rigidities, notably a lack of a spike in wage change distributions at zero. The abundance of zero wage changes presumably reflects some hindrance in the accuracy and speed of wage adjustment. This chapter uses a very detailed British data source (the New Earnings Survey) that allows micro and macro measures of wage rigidities to be calculated. In addition, because the data span 1975 to 2000, the time pattern of the micro- and macro-flexibility measures can be compared. For each test (macroor microeconometric), we will also address whether the evidence has shifted over time. This is a very limited form of agreement between macro and micro definitions of wage flexibility, but even this is a challenge for wage flexibility measures. For many policy issues establishing the current status of the economy is critical, although the history is interesting as the source of conventional views. To keep the analysis simple we evaluate whether there has been a one-time shift in the parameters of interest....

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