THE 1990-91 WAGE ROUND

The 1990-91 pay round could hardly have started against a less propitious background. Retail price inflation -still the principal target for wage negotiators despite its unreliability as a measure of inflation -is at 10 per cent and rising. The shock to oil prices will boost prices and add to wage demands -the natural desire to seek recompense in higher wages will be little impressed by the economist's argument that it is not possible to offset the real income shock to oil consumers by raising nominal incomes. And while cost pressures are pushing up prices, almost every other factor is working in the opposite direction. Domestic demand is at last responding to high interest rates, while the recovery in the pound has worsened UK competitiveness by 10 per cent since the start of the year and this is now taking its toll of exports, hitherto the only buoyant component of demand. The CBZ is warning forcibly that recession is beckoning. How will wages respond to a situation where a backward-looking view points to higher settlements but a forward-looking view indicates the need for wage moderation?     

Labour Values,Prices of Production and the Effects of Income Distribution: Evidence from the Greek Economy

This paper explores the relationship between labour values, prices of production and changes in income distribution in an actual economy. For this purpose we use a linear model of production with circulating capital and homogeneous labour, assuming that wages are paid ex ante. On the basis of this model and data from input–output tables of the Greek economy for the period 1988–1997 we estimate the labour values and prices of production, which are normalized with the use of the Sraffian standard commodity and the actual output vector. Furthermore, we extend Steedman's polynomial approximation of prices of production to include the case where wages are paid ex ante and the accuracy of this approximation is tested with actual input–output data. Finally, we find that prices of production change as a result of hypothetical changes in income distribution more often than not in a monotonic way and in a few cases display curvatures that reverse the order between prices of production and values.     

Introducing the supply side into the LBS Model

This Briefing Paper describes a new version of the London Business School model, which incorporates our most recent research on the supply side. The changes reflect the desire to improve the specification of the supply-side of the model, and to capture the effects of taxes on the incentives to save, invest and to work, while still retaining the basic features of the income-expenditure framework. The main features of the new model are: - Gross domestic product is determined as the sum of the outputs of five sectors. Previously GDP was determined by the demand side as the sum of the expenditure components. - Domestic demand for the output of the private sector depends on domestic absorption and on the price of this output relative to import prices. Overseas demand for exports depends on world economic activity and on the price of exports relative to the world price of exports. - Supply depends on the capital stock, real unit labour costs and real raw material prices. In the short run, input prices are allowed to affect the mix between goods which are exported and those which are supplied to the domestic market. In the long run, however, the mix depends only on the price of exports relative to the price of domestically supplied goods (i.e., relative profitability). - In the short run, disequilibrium in the goods market is reflected in adjustments to prices, inventories and the external balance. - Since gross domestic product is determined by summing the output of each sector, output decisions are reconciled with expenditure decisions by making imports the difference between final expenditure and aggregate supply. - In the long run, increases in government expenditure crowd out private expenditure, but the effect takes several years to come through. - A cut in corporation taxes which is not financed by higher taxes elsewhere boosts the supply side by raising investment and the capital stock, but not by enough to raise revenues sufficiently to pay for the tax cut. Private sector saving increases but not by enough to fund higher public sector borrowing, so the current account goes into deficit. - In the short run, both supply and demand factors influence economic activity; in the long run, the path of the economy depends only on population growth, capital accumulation and technical progress.     

Determinants of Relative Sectoral Prices: The Role of Demographic Change

Demographic change raises demand for non‐tradable old‐age related services relative to tradable commodities. This demand shift increases the relative price of non‐tradables and thereby causes real exchange rates to appreciate. We claim that the change in demand affects prices via imperfect intersectoral factor mobility. Using a sample of 15 OECD countries, we estimate a robust increase of relative prices. According to our main estimate, up to one fifth of the average increase in relative prices between 1970 and 2009 can be attributed to population ageing. Further findings confirm the relevance of imperfect factor mobility: Countries with more rigid labour markets experience stronger price effects.     

A SURVEY OF THE EFFECTS OF THE MINIMUM WAGE ON PRICES

Abstract.  It is well established in the literature that minimum wage increases compress the wage distribution. Firms respond to these higher labour costs by reducing employment, reducing profits, or raising prices. While there are hundreds of studies on the employment effect of the minimum wage, there are merely a handful of studies on its profit effects, and only a couple of dozen studies on its price effects. Furthermore, a comprehensive survey on minimum wage price effects is not available in the literature. Given the policy relevance of this neglected issue, in this paper we summarize and critically compare the available evidence on the effects of minimum wages on prices.     

Accounting for wage and employment changes in the US from 1968–2000: A dynamic model of labor market equilibrium

In this article, we present a unified treatment of and explanation for the evolution of wages and employment in the US over the last 30 years. Specifically, we account for the pattern of changes in wage inequality, for the increased relative wage and employment of women, for the emergence of the college wage premium and for the shift in employment from the goods to the service-producing sector. The underlying theory we adopt is neoclassical, a two-sector competitive labor market economy in which the supply of and demand for labor of heterogeneous skill determines spot market skill rental prices. The empirical approach is structural. The model embeds many of the features that have been posited in the literature to have contributed to the changing US wage and employment structure including skill-biased technical change, capital-skill complementarity, changes in relative product-market prices, changes in the productivity of labor in home production and demographics such as changing cohort size and fertility.     

Feasibility and optimality of the initial capital stock in the Ramsey vintage capital model

Using a discrete-time version of the Ramsey Vintage Capital Model we provide a characterization of the set of initial capital stocks compatible with a predefined scrapping time, given the rate of technical progress and the level of capital productivity. Each profile of initial capital stock in that set generates a complete infinite horizon feasible capital path. From that characterization, we prove the existence of a minimum value for the scrapping time of the machines compatible with the rate of technological progress. Moreover, for each level of capital productivity, there exists an upper bound for the technological progress which allows the existence of feasible capital paths with full employment. Finally, we transform the infinite horizon dynamic programming problem into one of finite dimension. We use this to find the optimal lifetime for the machines as well as the optimal composition of the initial capital stocks. A numerical example shows that, in accordance with the infinite horizon approach to the problem, the increase in the rate of technological progress leads to a decrease in optimal scrapping time of capital goods.     

Prices and factor demand in an endogenized input–output model

This paper combines factor demand functions (for intermediate input and labour) and price equations (derived from a Generalized Leontief cost function) with the traditional input–output price model. The cost functions determine factor demands for materials and labour as well as output prices at given input prices. At the second level of aggregation, the intermediate demand as a single input is split proportional to the elements in the column of the technical coefficients matrix. The emphasis in this endogenization of technical coefficients is on two features. First, the repercussion of output on input prices, and, second, the link between the econometric model for the supply side and the input–output demand model.     

The London Business School with Gower Publishing

Immediately after the year-long coal strike the prospects for the industry appeared remarkably bright. Normal production was resumed more quickly than expected. The fall in the exchange rate, especially against the dollar, had greatly lessened the threat from cheap imported coal. The number of miners employed in deep mines was quickly reduced from 180,000 to 140,000, and the closure of uneconomic pits enabled production in the new super-pits to be stepped up. The resulting sharp rise in productivity meant that the underlying position of the industry was close to break-even, and at the coal prices prevailing last year could even have made a modest profit.
The fall in the price of oil has plunged the industry into a new crisis. To preserve coal's market share, its price must follow oil prices downwards, which will drastically reduce the amount of coal that can be profitably produced in this country. with obvious implications for employment. In this Forecast Release we present some calculations (using the approach we adopted in earlier articles published in October and December 1984) which show the scale of the required reductions, and consider the policy implications. We conclude that there 13 no case for constraining coal prices to remain above true market-clearing levels, since this amounts to a concealed tax on coal- (and hence electricity-) users which would hamper the employment-creating growth of manufacturing industry. There is however a strong case for allowing the coal industry to increase its borrowing to cover the deficits that result from keeping higher-cost pits in production in order to reduce future dependence on imported oil.     

The distributive and welfare effects of product and labour market deregulation

This paper studies the effects of product and labour market deregulation on wage inequality and welfare. By constructing an analytically tractable model in which the level of product market competition and the wages are endogenously distributed among sectors, I show that deregulation in goods market has mixed effects on inequality: the wage variance and the Gini index are lower, but the ratio of the highest over the lowest wage paid in the economy increases. Moreover, deregulation in labour markets raises the aggregate level of employment and the average real wage but reduces the welfare of trade unions in sectors with a low level of competition.     

Prices,wages, and import prices in Israel: 1970–1983

This paper presents an empirical investigation of the dynamics of prices, wages and import prices in a small open economy using data for Israel in the accelerating inflationary period of 1970–1983. The appropriateness of the specification of a price equation as a function of import prices and wages is critically reviewed using Sims's methodology. The main finding is that the only significant lags in the representation of the rate of change in prices, wages and import prices are the lags of the rate of change in prices (the rate of inflation). Other factors in the representation are attributed to market forces influencing real wages and the real exchange rate. Testing the correlation of the estimated VAR residuals leads to the conclusion that a short-term inflation equation specified as a function of present and past wages is not acceptable. A further decomposition of the VAR residuals presents evidence in favour the hypothesis that price shocks contribute to the explanation of the inflationary process in Israel. A rational expectation interpretation of the results is proposed, followed by some policy implications.     

The US Recession

In the last five months US industrial production has fallen 71/2 per cent, while GNP fell by over 2 per cent in the second quarter. In April, when the latest figures were indicating that industrial production had fallen 1 per cent in February-March, President Carter admitted that the economy was "probably now in recession", with the qualification that it would be "mild and short". This was followed almost immediately by the news that the index of leading indicators had recorded its largest ever fall in April, and, from President Carter, the admission that recession had come to the US "quicker and steeper than we thought" and that the outlook looked "serious". Subsequently the fall in industrial production has gathered pace and in the last three months alone output has fallen by nearly 7 per cent. In the recession of the mid-19 70s industrial production fell by over 15 per cent in the space of six months, from September 1974 to March 1975. Over a rather longer period from the end of 1973 to March 1975 GNP registered a fall of over 5 per cent most of which was concentrated in the latter six months. In this Forecast Release we examine the cyclical behaviour of the US economy and, by comparing the recent experience with that of 1974-75, attempt to throw some light on the likely extent and depth of the current recession. As in our Forecast Release of May we remain of the opinion that the recession is unlikely to be either "mild"or "short"     

COMPETITIVENESS WITHIN THE EURO AREA: THE PROBLEM THAT STILL NEEDS TO BE SOLVED

Unsustainable public debt, low competitiveness and high current account deficits are major problems for the so‐called PIIGS countries. These countries experienced consumer price and wage inflation above the euro area average in the first decade of the euro, basically fuelled by buoyant capital inflows. The resulting real appreciation against low‐inflation countries led to a deterioration in their competitiveness, but rigid labour markets now prevent a quick market‐based readjustment of real wages to the changed situation. Thus, both public expenditure cuts and structural labour market reforms are urgent to reduce the likelihood of a euro area break‐up.     

Capital,credit constraints and the comovement between consumer durables and nondurables

Evidence indicates that consumer durables are more flexibly priced than nondurable goods and services. In otherwise standard two-sector neoclassical sticky-price models with flexible durable prices, following monetary tightening, nondurables decrease but consumer durables increase. Friction in lending between households can resolve the comovement problem if durable prices are sticky. However, if durable prices are flexible, friction in lending fails to generate joint decline. This paper resolves the co-movement problem by adding capital into a model with flexible durable prices and friction in lending. When capital is needed in production, monetary tightening reduces the relative price of durables which induces investment and decreases firms' real profits in the short run. Due to fewer profits remitted from firms, savers have a lower disposable income and cannot increase expenditures on consumer durables as much as otherwise. As a consequence, aggregate consumer durables decrease and there is a joint decline of nondurables and consumer durables.     

Markup Pricing and the Auto Industry: A Partial Explanation of Stagflation in an Oligopolistic Economy

A bstract . Price leadership firms and especially wage leadership unions frequently are not operating at points of maximization in the neoclassical sense, because contrived high level demand has brought low price consciousness or elasticity of demand for their commodities or services. Accordingly, they can get higher profits or wages anytime they choose to raise their price except during severe recession. If output falls as a consequence, goveniment and the central hank have stood ready to expand total spending. The contrived high demand has interacted with oligopolistic practices to obviate the distinction between elasticity for the firm and that of its industry, with empirical studies showing demand elasticity commonly not much above unity. The automobile industry is the focus of attention in this study. It appears that stable and high employment market capitalism no longer is possible, because at a minimum t requires generalized maximization behavior, which involves operation against constraining supply and demand parameters.     

Black trade unions and the wage gap in South Africa

This paper puts forward a model of real wage determination for black workers in South Africa. The model is fitted to data for mining and manufacturing for the post-war period. It is found that since 1980 the rise of black trade unions has been a major factor underlying wage increases in manufacturing. In the 1970s, rising gold prices and reduced foreign labour supplies were favourable for mining labour, and in both industries pass law limitations on mobility are found to have lowered balck wages.     

MEASURING HUMAN CAPITAL AND ITS EFFECTS ON WAGE GROWTH

Abstract Ever since Mincer, years of labour market experience were used to approximate individual's general human capital, while years of seniority were used to approximate job‐specific human capital. This specification is restrictive because it assumes that starting wages at a new job depend only on job market experience. In this paper, I investigate the effects of human capital on wage growth by using a more flexible specification of the wage equation, which allows for a rich set of information on past employment spells to affect the starting wages. In addition, I endogenize the labour mobility decision. In order to illuminate the effects of human capital accumulation patterns on wage growth, I compare counterfactual career paths for representative individuals.     

Interdependence and the location of economic activities

This paper deals with the ability of a decentralized price system to sustain an optimal assignment of activities assuming complete interdependence among them. There are two goods, each of which is used in its own production and in the production of the other, along with land. An infinitely elastic final demand exists for both goods at given market prices, and either good may be imported. It is demonstrated that a decentralized price system will sustain an optimal allocation of land, and that a nonoptimal allocation of land will not be sustained.     

Input–Output Analysis,Labour Scarcity and Relative Price Endogeneity: Aggregate Demand Disturbances in a ‘Flex-price’ Leontief System

In this paper, we introduce scarcity into a conventional demand-driven input–output system to produce a ‘flex-price’ Leontief model. We retain the fixed technical coefficients but allow changes in relative prices to reflect variations in the real wage. Because the consumption coefficients increase with the real wage, the aggregate labour demand curve is found to be upward sloping. This produces conventional results, as long as the labour supply curve is perfectly elastic (horizontal). However, once we introduce labour scarcity, in the form of an upward sloping labour supply function, we derive the seemingly paradoxical result that the output and employment effects of a demand expansion are greater here than in conventional input–output. Through simulation, this result is found to be strongly dependent on the assumption of export exogeneity.     

House Prices, Housing Investment and Demography Forecasts from the LBS/Abbey National Model of the UK Housing Market

A new housing sector has been incorporated into the London Business School model. This article outlines the new housing model, summarizes the research which has gone into its construction, and presents a forecast of the UK housing market. Using the new housing model, we forecast a moderate recovery in the housing market in the later part of 1991 and 1992. This recovery is however short-lived and does not result in such high rates of house price increase as previous house price booms (Chart 1).
Cuts in interest rates following entry to the exchange rate mechanism of the EMS prompt a recovery in house prices from the middle of 1991. House price inflation then peaks with an increase in average UK house prices in 1992 of 11 per cent over the previous year. Increases in real personal disposable income are modest, by the standards of the 1980s, and for this reason the recovery does not develop the momentum of previous house price booms. House price inflation moderates again in 1993 falling back to around 7 per cent. Housing starts and housing investment recover only slightly from their present depressed levels.
the recovery in house prices is weaker than that foreseen in our April Forecast Release. This is because real personal disposable income is now forecast to grow more slowly during 1991. Sterling's membership of the ERM is followed by a fall in interest rates, but it is the timing of interest rate cuts rather than their magnitude which differs from the earlier forecast. The changed profile of interest rates has altered the house price forecast only marginally.