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Article Summary

Pendleton, Andrew. 1997. "What Impact Has Privatization Had on Pay and Employment:A Review of the UK Experience." Industrial Relations 52 (3): 554-579.

Since 1979, the United Kingdom has reduced employment in public sector from 7.3 million to 5.3 million, by transferring public services to private ownership and contracting out and competitive bidding. The former, the transfer of public ownership to private ownership, was achieved at the state level by the sale of public corporations and utilities such as British Telecom and British Gas and Water Supply Company. The latter, contracting out and competitive bidding, was accomplished in local governments and parts of central government.

The objectives of the privatization in UK are as below:

  • An ideological concern: to reduce the role of the state and to promote consumer choice.
  • A set of economic reasons: embracing a change in the structure of the economy, and promoting efficiency and enterprise.
  • Managerial concern: rationalizing the internal structures of state-owned organizations.
  • Financial benefit.

There have been two steps in privatization in the UK:

  • Phase 1(1979-1984): The sale of firms already operating in competitive market and ancillary firms of nationalized industry. This was propelled by ideological hostility to the public sector.
  • Phase 2 (1984-present): The sale by public flotation of utilities and other key nationalized industries. The characteristic of this phase is securing wide public participation in the share offers rather than promoting competition and maximizing receipts. Phase 2 was driven by questions of political advantage aimed at the increasing the proportion of the electorate likely to vote conservative rather than promoting economic efficiency.

Expected impact of privatization on industrial relationships

  • Privatization could be expected to make pay determinations more responsive to markets and performance than to political factors through elimination of public sector trade unions, which had immense power in pay determination. Therefore pay and benefits would be harmed.
  • Economists argued that the pursuit of profits would lead to internal efficiencies. From the viewpoint of agency theory, privatization would reduce the difficulty in monitoring due to asymmetric information between firms and government, and would provide incentives to improve firm performance. Accordingly, privatization would modify traditional patterns of labor, management, and industrial relationships.
  • In contrast to monopolies, which can secure higher levels of profitability by adjustments to prices rather than costs, competition between firms would result in lower labor costs and improved productivity.

In summary, a convergence of pay trends between privatized firms and other private firms and reduction of employment were expected as a result of privatization.

Realized impact of privatization on industrial relationship

The actual experience in the UK provides little clear-cut evidence in favor of the arguments above:

  • Pay
    • Haskel and Szymanskys study compared 14 public sector firms and the economy as whole, and found that change of ownership did not affect pay levels. That is, there were no clear differences between the privatized and public sector firms.
    • Contracting out and competitive bidding resulted in reducing cost. However, there were little reduction of pay and benefits. That is, the reduction in the cost may be secured primarily by improvements in labor productivity and reductions in employment rather than adjustments to pay and benefits.
  • Employment
    • There is evidence of a fall in employment around the time of privatization in some firms, but also there is counter-evidence of increases in employment in others. However, in local authority service, most organizations securing contract reformed work practices and reduced employment levels.
    • Lack of reduction in employment levels can be attributed to monopolies (where competition is limited, pressure for greater profitability may well be secured by raising price rather than reducing cost), governmental control on the quality of service (resulting in difficulty in reducing staffing), or low tolerance of private firms for adverse public reactions to staffing reductions.


  • Deregulation and exposure to product market competition have a more powerful impact on firm behavior than transfer of ownership; the clearest indication of the power of competition comes from the local authority sector, where employment levels have fallen among both private and public sector service providers.
  • Continuity in pay and employment among some monopoly privatized utilities with industry-specific technology could be partly explained by the lack of an alternative source of labor supply.
  • Some of the most dramatic changes in labor management in privatized firms was due to deregulation of labor market rather than privatization.
  • Therefore, the impact of privatization on labor relationship depends on labor market, product market competition, and transfers of ownership.