The price is right: inflation and nominal wage adjustment in Britain

How much changed regarding the wage employment relationship in Britain between 1979 and 1994, as the government tried to encourage greater wage and employment flexibility? This paper uses settlement group wage contact data to track the evolution of nominal wage settlements over time and examines the impact that inflation has on these outcomes. We show that dissegregated wage determination is consistent with a continuing disdain for nominal wage cuts on the part of both employees and employers. Paradoxically, price inflation, rather than institutional reform of the labour market may have done more to pormote real wage adjustment across establishments in Britain. During periods of high inflation, the distribution of manufacturing real wage settlements shifts to the left, resulting in an increase in the number if settlement groups who experience real wage cuts. High levels of inflation appear to be associated with lower real wage increases for a given shock. The correlation between real wages and subsequent employment adjustment appears to be very weak.