Aggregation bias in labour demand equations for the UK economy *

The responsiveness of employment to changes in real wages is an issue of considerable importance, particularly for policy analysis, and over the past decade a number of studies have been devoted to this issue in the UK. No table examples include the papers by Nickell (1984), Symons (1985), Wren-Lewis (1986), and Burgess (1988) for the manufacturing sector, and by Beenstock and Warburton (1984), Layard and Nickell (1985, 1986) for the private sector and the economy as a whole. In contrast to the earlier work by Godley and Shepherd (1964), Brechling (1965), and Ball and St Cyr (1966), these recent studies find a significant and quantitatively important effect for real wages on employment. The point estimates of the long-run wage elasticity obtained in these studies vary widely depending on the coverage of the data (whether the data set used is economy-wide or just manufacturing), and on the specification of the estimated equations. A recent review of these studies by HM Treasury (1985) concludes that the estimate of long-run wage elasticity most likely falls in the region —0.5 to —1 although, under the influence of Layard and Nickell's important contributions, for the economy as a whole the ‘consensus’ estimate of this elasticity in the UK currently seems to centre on the figure of —1. ¹ All these studies are, however, carried out using highly aggregated data, either at the level of the whole economy or the manufacturing sector, and given the significance of their results for macroeconomic policy it is important that the robustness of their results to the level of aggregation chosen are carefully investigated.