Privatization, Liberalization, Wages and Employment: Theory and Evidence for the UK

Abstract

Most agency-based privatization models are of the owner/manager relation and ignore the labor market. Yet in the 1980s there were profound changes in public sector and privatized firms to wages and employment. The authors develop a bargaining model of the manager/workforce relation that explains employment and wages when firms are privatized, government objectives become more commercial, and markets are liberalized. Using data on fourteen U.K. companies, 1972-88, that were publicly owned in 1972, the authors find: (1) employment fell following the change to more commercial objectives; and (2) wages were only slightly affected by this, but fell if the firm lost market power. Copyright 1993 by The London School of Economics and Political Science.