The Effect of Competition on Wages and Productivity

This paper examines the impact of competition on wages and productivity using a panel data set of UK manufacturing industries over 1954-1973. The introduction of cartel law in the UK in the late 1950s caused an intensification of price competition in previously cartelized manufacturing industries, but it did not affect those industries which were not cartelized. The econometric results from a comparison of the two groups of industries before and after the introduction of cartel law provide strong evidence of a negative effect of collusion on labour productivity growth. There is no evidence of any effect of collusion on wages. These results are robust to controlling for the potential endogeneity of collusion and are further strengthened by a comparison with US data. JEL classification: L1, L6, J2, J3, O4 *I am grateful to Stephen Nickell, the editor Julio Rotemberg and an anonymous referee for very helpful suggestions. I would also like to thank seminar participants at the Universities of Barcelona, Kent, Cyprus, Leicester, the 2002 IFS/CEPR workshop on “Innovation and the Structure of Product Market Competition”, the 2002 EARIE Conference and the 2003 European Meeting of the Econometric Society for helpful comments and discussion. Address for correspondence: Department of Economics, University of Essex, Wivenhoe Park, Colchester CO4 3SQ, U.K. E-mail: [email protected]