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Skill Shortages, Productivity Growth and Wage Inflation in UK Manufacturing

Author

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  • Haskel, Jonathan
  • Martin, Christopher

Abstract

We estimate the impact of skilled and unskilled labour shortages on productivity and wages in the United Kingdom. Skill shortages are higher on average and more variable over the business cycle in the United Kingdom than in comparable economies. Unskilled shortages are comparatively rare, so most of our work concentrates on skill shortages. The bulk of evidence suggests that shortages are related to educational attainment rather than the failure of firms to adjust wages. There are two potential effects of shortages on productivity. First, we argue that shortages add to the cost of employing skilled workers since a firm must wait longer than usual to fill its vacancies. This may lead firms to employ less skilled and more unskilled workers. Second, labour shortages make it less easy for firms to extract effort from their workers. Both of these effects reduce productivity. We provide empirical evidence from two panel data sets of UK manufacturing from 1980-89. We use data from 81 manufacturing industries and also from 33 engineering industries where there is better information on the skill composition of the workforce. Both data sets suggest that the growth of skill shortages in the 1980s reduced productivity growth by about 0.4% per annum (average productivity growth was 5% per annum). Unskilled shortages had no effect. Finally labour shortages might increase nominal wage growth by putting workers in a stronger bargaining position. Both our data sets suggest that skill shortages raised wage growth over the period by about 1% per annum (average wage growth was 7%).

Suggested Citation

  • Haskel, Jonathan & Martin, Christopher, 1993. "Skill Shortages, Productivity Growth and Wage Inflation in UK Manufacturing," CEPR Discussion Papers 859, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:859
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    Citations

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    Cited by:

    1. Neugart, Michael & Schömann, Klaus, 2002. "Employment outlooks: Why forecast the labour market and for whom?," Discussion Papers, Research Unit: Labor Market Policy and Employment FS I 02-206, Social Science Research Center Berlin (WZB).
    2. Luigi Bonatti, 2003. "'Soft' growth and the role of monetary policy in selecting the long-run equilibrium path," Working Papers (-2012) 0306, University of Bergamo, Department of Economics.
    3. Maria De Paola & Vincenzo Scoppa, 2002. "Firms' Training Decisions and Unemployment in Italian Labour Markets," Giornale degli Economisti, GDE (Giornale degli Economisti e Annali di Economia), Bocconi University, vol. 61(1), pages 103-126, June.
    4. Luigi Bonatti, 1999. "Growth, real interest, employment and wage determination," Department of Economics Working Papers 9907, Department of Economics, University of Trento, Italia.

    More about this item

    Keywords

    Job Marketing; Productivity Growth; Skill Shortages; Vacancy Duration; Wage Inflation;

    JEL classification:

    • J24 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Human Capital; Skills; Occupational Choice; Labor Productivity
    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials
    • L60 - Industrial Organization - - Industry Studies: Manufacturing - - - General

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