4 customary timing of settlements of different size groups.

Therefore, whilst one might expect $ not to be dominated

by purely economic factors (and this is the conclusion of Johnston

and Timbrell, 1973, amongst others) the very presence of incomes

policy will have an important influence. Evidence on contract

length from the Aberdeen database finds some support for the

idea that contract length is reduced in times of rapid inflation

but no conclusive evidence to draw inferences regarding the role

of incomes policy on contract duration. ^ For example, a wage

freeze might be expected to substantially reduce the level of wage

settlements. To deflate the wage variable b y the proportion of

workers settling in a given period would clearly be an inappropriate

way to measure the influence of incomes policy since the main aim

of policy is to reduce the rate of growth of the wage bill regardless

of whether this comes from a reduction in the size of average

6

settlement or the number of settlements. In Chapter S the

influence of policy rules on the timing of settlements was

discussed and this influence would be increased by any

anticipation or catch-up effects. In principle, incomes policies

whi c h involve a twelve-month rule for settlements should also

affect the timing of settlements but if such a rule follows a

period of freeze then the rule may not have such an effect since

the freeze would have already extended the length of contract.

7

Tarling and Wilkinson (1977) using data on national negotiations

■ I

6.5

behaviour with a consistently higher proportion of bargaining

groups settling in each year and with a near

100

per cent

settlement rate since 1974. This might be explained by the

institutionalisation of the

12

-month rule by the fact that price

and wage inflation was significantly higher after 1970 and under

these circumstances one might expect groups to settle more 8

rapidly than otherwise.

The preferred approach to this question is to isolate

the normal (if there are any) institutional patterns in wage

settlements from the total as deferred settlements, anticipation

and catch-up effects can be dealt with explicitly within the equation.

The issue regarding the differencing of the wage variable

is also related to the timing of settlements. Rowley and Wilton

(1973) set out a model where wages are set annually for all

workers and then fixed until the next annual settlement and the

relative change in the wage rate over its value four quarters

earlier is given by a moving average of the importance of the

groups settling within each quarterly period. On the assumption

that these weights are equal the model then induces a fourth-order

moving average serial correlation process which results in

biased estimates of the standard errors.

Returning to (6.1) we have Alog Alog W S C

if Alog WSt - a+

8

X t + et

_(6.2)

then Ashenfelter and Pencavel (1975) show that:

Alog - a $ t B$tX t ♦ v fc ( S 3 )

where v £ — q>ce t . The disturbance term therefore depends systematically

6.6

They go on to show that for:

logWt - log W

t_4

- « ♦

0

Z * t-i V i

i - 0

. X^ . + E

i

-0

t-i

(6.3)

and ♦ - i for all periods; i.e. workers settle evenly throughout

the year then:

3 3

log W t - logW

t_4

- a +

6

Z iXfc_ i ♦ E . v ^ (6.4)

i

-0

i

-0

- « + i SEX . + Z

Ashenfelter and Pencavel then argue that there is no reason

why (6.3) should not be fitted directly. However, the same

objections as outlined earlier remain. The major question is whether

the lags on the price and real wage variables should be

1

quarter

or 4 quarters. If we were dealing with a group of workers settling

at period t, having previously settled in t-4, then the four-quarter

lag might seem the more appropriate. However, the logic of the real

wage catch-up implies that it is the current size of the real wage

gap that is relevant not the gap at the time of the last settlement.

Therefore the real wage lagged one quarter is the correct variab le.

In terms of the real wage model there is no additional role for

price inflation since this is already incorporated in the real wage

catch up. Therefore its role must relate more to expected inflation.

In earlier versions of the model the specification used was

largely that of equation (3. 12) ; i.e.

w t - bQ (

1

-k) + b 1 (

1

-k) u t + b

2

(l-k)pt

6.7

but including also the term w c_^> The rationale for this term was

that it reflected the influence of settlements made by other workers

in the previous period. A term in the proportion of workers

settling might be included on the right hand side of the equation.

However, when the settlements term is decomposed into non-seasonal

and seasonal elements (using seasonal dumnies to represent the

seasonal elements) it is the latter which provide all of the 9

statistical explanation Therefore it is clear that the

proportion of settlements is not a useful addition to the equation,

rather it is the seasonal factors reflecting regular changes in

the proportion of workers settling in each period which helps to

explain variations in the rate of wage inflation.

6.2 Anticipation and catch-up effects

Previous chapters have emphasised the importance of allowing

as far as possible for timing effects relating to policy. In

In document Incomes policy in the U K 1960 79: modelling and analysis (Page 160-163)