The Relation between unemployment and the rate of change of money wage rates in the United Kingdom

The Relation Between Unemployment and the Rate

of Change of Money Wage Rates in the

United Kingdom, 1861-19571

By A. W. PHILLIPS

I. HYPOTHESIS

When the demand for a commodity or service is high relatively to

the supply of it we expect the price to rise, the rate of rise being greater

the greater the excess demand. Conversely when the demand is low

relativelyt o the supplyw e expectt he pricet o fall, the rate of fall being

greater the greater the deficiency of demand. It seems plausible that

this principles hould operatea s one of the factorsd eterminingth e rate

of change of money wage rates, which are the price of labour services.

When the demand for labour is high and there are very few unemployed

we should expect employers to bid wage rates up quite rapidly, each

firm and each industry being continually tempted to offer a little above

the prevailing rates to attract the most suitable labour from other

firms and industries. On the other hand it appears that workers are

reluctant to offer their services at less than the prevailing rates when

the demandf or labour is low and unemploymenits high so that wage

ratesf all only verys lowly. The relationb etweenu nemploymenat ndt he

rate of changeo f wager atesi s thereforel ikelyt o be highlyn on-linear.

It seemsp ossiblet hat a second factor influencingt he rate of change

of money wage rates might be the rate of change of the demand for

labour, and so of unemployment. Thus in a year of rising business

activity, with the demand for labour increasing and the percentage

unemploymendt ecreasing,e mployersw ill be biddingm ore vigorously

for the services of labour than they would be in a year during which

the averagep ercentageu nemploymentw as the same but the demand

for labourw as not increasing. Converselyin a year of fallingb usiness

activity, with the demand for labour decreasing and the percentage

unemploymenitn creasinge, mployersw ill be less inclinedt o grantw age

increases, and workers will be in a weaker position to press for them,

than they would be in a year during which the average percentage

unemployment was the same but the demand for labour was not

decreasing.

A third factor which may affect the rate of change of money wage

rates is the rate of change of retail prices, operating through cost of

living adjustmentsin wage rates. It will be arguedh ere, however,t hat

cost of living adjustments will have little or no effect on the rate of

change of money wage rates except at times when retail prices are

1 This study is part of a wider research project financed by a grant from the Ford

Foundation. The writer was assisted by Mrs. Marjory Klonarides. Thanks are

due to Professor E. H. Phelps Brown, Professor J. B. Meade and Dr. R. G. Lipsey

for comments on an earlier draft.

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