Ten Years of Mrs. T.

We argue that the 1970s were characterized by attempts to maintain a cooperative, low-unemployment equilibrium in the face of considerable union power, through the use of incomes policies and neo-corporatist machinery. The 1980s saw a shift away from this, toward direct measures to limit union power. This, together with the adoption of tight macroeconomic policies, explains the initial rise in unemployment. Empirical evidence suggests that its persistence throughout the decade is due to the effect of prolonged unemployment on the search behavior of the outsiders, rather than the insider mechanism emphasized by Blanchard and Summers, and others.
The reduction in union power also helps to explain the acceleration in productivity growth. The craft nature of much of the British union movement has led to a multiplication of bargaining units within firms. Bargaining in isolation a union can perceive overmanning and other restrictive practices as being in its interests, resulting in low wages and productivity. A fall in union power results in a reduction in these inefficiencies and leads not only to a rise in productivity but also in wages. Cross-section empirical evidence supports the thesis that the productivity acceleration has been greatest where multi-unionism is present. We also show how this explains the widening in pre-tax as well as post-tax earnings.