extra i observations should be excluded from both the policy "on"
1 per cent and that for 966-7 to over 2 per cent.
The study by the NBPI (1968) uses annual data and distinguishes
between tight and moderate policy; 1965 being classed as the
latter and 1961-2 and 1966 as the former. The estimated policy
effects are not statistically significant but the coefficients are
almost identical at around 1 per cent. The study by Parkin et a l .
(1976) includes only two dummy variables; the first covering the
pay pause of 1961-2 and the second the period 1966(3) - 1967(2).
Neither policy dummy proves statistically significant, the estimate
for the first policy phase being positive whilst the second phase
has a coefficient of the expected negative sign which implies a
reduction in wage inflation of just over 1 per cent.
All the studies cited so far use the Phillips curve as the
basic form of wage equation. However, despite regular resuscitation,
confidence in the Phillips curve as an empirical description of
wage behaviour was low in the 1970s and the study by Henry et a l .
(1976) turned to the real wage resistance model. Henry et a l . (1976)
also use the dummy variable approach and extend the estimation period
to 1974. They distinguish between two periods of policy after
1961, the wage-freezes of 1966 (1966(3) - 1967(2)) and of 1972
(1972(4) - 1973(4)). Only the former policy period emerges as
statistically significant with an effect of over 1 per cent.
Sheriff (1977) uses a neo-classical model of wages whereby
wages depend on output, employment, prices and time. The model is
applied to manufacturing industry using the intercept dummy
approach. However, Sheriff goes one step further than many of
the other studies by identifying fourteen separate dummies, of
also specified and the model estimated simultaneously over the
period 1959(1) to 1973(4). Two of the announcement dumnies are
significant - those for the freeze of 1966(3) and for the freeze
of 1972(4). However, whilst the coefficient on the former is
negatively signed that on the latter is positive. Sheriff explains
this result by differences in the timing of the policy announcement
within the quarter. However, Sheriff's definition of the announce
ment effect is perhaps ambiguous. Whereas one interpretation
of the announcement effect would be that effect on wages which
occurs between declaring the intention to apply the policy and
actual commencement of the policy, an alternative interpretation used
by Sheriff is whether the impact effect on wages differs from the
continuous effect. Both the significant announcement effects
have comparable magnitudes of response, namely 3 per cent. Of the
seven continuous dummies, three are statistically significant:
those covering the period 1962(3) — 1964(4); 1966(4) - 1967(1); and
1968(3) - 1969(4). Two of the announcement dummies are almost
identical in magnitude to the succeeding continuous dummies (1961(3)
and 1966(3)). It is difficult to see why the period between 1967(2)
and 1968(2) was excluded from the analysis since a tighter policy
was clearly in operation then than in the following eighteen months.
Although the Sheriff approach is less restrictive in its coverage
of policy it does lead to the problem of multiplicity of dummies
referred to earlier. For example. Sheriff uses three separate
dunsny variables in 1973 to cover only four observations with the
consequent problem that the implied policy estimates will also
include random errors.
Henry and Ormerod (1978) also use a real wage resistance
model and include observations from 1961 to 1977(2). However the
2.24
also specified and the model estimated simultaneously over the
period 1959(1) to 1973(4). Two of the announcement dummies are
significant - those for the freeze of 1966(3) and for the freeze
of 1972(4). However, whilst the coefficient on the former is
negatively signed that on the latter is positive. Sheriff explains
this result by differences in the timing of the policy announcement
within the quarter. However, Sheriff’s definition of the announce
ment effect is perhaps ambiguous. Whereas one interpretation
of the announcement effect would be that effect oh wages which
occurs between declaring the intention to apply the policy and
actual commencement of the policy, an alternative interpretation used
by Sheriff is whether the impact effect on wages differs from the
continuous effect. Both the significant announcement effects
have comparable magnitudes of response, namely 3 per cent. Of the
seven continuous dummies, three are statistically significant:
those covering the period 1962(3) - 1964(4); 1966(4) - 1967(1); and
1968(3) - 1969(4). Two of the announcement dummies are almost
identical in magnitude to the succeeding continuous dummies (1961(3)
and 1966(3)). It is difficult to see why the period between 1967(2)
and 1968(2) was excluded from the analysis since a tighter policy
was clearly in operation then than in the following eighteen months.
Although the Sheriff approach is less restrictive in its coverage
of policy it does lead to the problem of multiplicity of dummies
referred to earlier. For example, Sheriff uses three separate
dummy variables in 1973 to cover only four observations with the
consequent problem that the implied policy estimates will also
include random errors.
Henry and Ormerod (1978) also use a real wage resistance
model and include observations from 1961 to 1977(2). However the
2.26
Notes to Table 2.
For general methodology see Table 2.1.
* denotes statistically significant policy effect.
NBPI (1966) uses an annual model; and distinguishes between types
of policy. 1961-2 and 1966 are regarded as tight and 1965 as loose.
Smith (1968). Results quoted are for the regular dummy variable and its effects on weekly wage rates.
Sheriff (1977) uses announcement dummies and continuous dummies, see Table 1.1.
Henry and Ormerod (1978): preferred equation from Table 9.
Effects are on the rate of acceleration of wage inflation. Estimates marked t are catch-up estimates.
Sargan (1980): details are taken from an earlier version of this
paper as they are not given in the final version. Figures in brackets refer to instrumental variable estimates.
2 .27
that used by Henry et a l . (1976) and consequently the dependent
variable is defined as the rate of acceleration of wage inflation.
The policy effects estimated should therefore be interpreted in this
way, as should the policy catch-up effects which Henry and Ormerod
allow for (but see the discussion earlier in the chapter). In
addition to the standard policy and catch-up dummies Henry and
Ormerod also include a shift dummy after 1975(2) to prevent the
model from breaking down. Even so it should be noted that only three
of the thirteen coefficients in their equation are statistically
significant at the conventional level (and one of the coefficients is the
first-order serial correlation coefficient). Henry and Ormerod are
not able to distinguish between alternative hypotheses regarding this
additional shift dummy. It is not clear therefore whether it can
be attributed entirely to incomes policy. The two significant policy
episodes are the period 1967(3)-1969(2) (but not the preceding freeze)
and the catch-up variable for this period. Although many of the
values of the catch-up effects are similar to those of the relevant
policy estimates no conclusion about catch-up effects is possible
given the lack of statistical determinacy.
All the studies referred to have treated incomes policy as
exogenous. An exception is the study by Sargan (1980). He uses
both the policy on/off and the dummy variable approach and in the
latter treats the dummy variables as endogenous variables within
estimation. Sargan finds that the policy on/off approach leads to
18