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Where Did Productivity Growth Go? Inflation Dynamics and the Distribution of Income

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Author Info
Ian Dew-Becker (Northwestern University)
Robert J. Gordon (Northwestern University)

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Abstract

Starting from the standard Gordon inflation model, which explains price changes by inertia, demand shocks, and supply shocks but excludes wages, the first part of this paper returns wages to the analysis by developing a model that includes both price and wage equations. The model allows for feedback between the two and captures the effect of changes in trend productivity growth on inflation, nominal wages, and labor’s income share. In dynamic simulations, changes in the productivity growth trend strongly boosted inflation during 1965-79 and slowed it between 1995 and 2005. The paper’s second part links the productivity growth analysis to changes in the income distribution. It finds, using IRS data, that only the top decile experienced real wage and salary income growth equal to or above average economywide productivity growth. And increasing inequality within the top decile was as important a source of growing inequality as the gap between the top and bottom deciles.

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File URL: http://www.brookings.edu/press/Journals/2006/brookingspapersoneconomicactivity22005.aspx
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Publisher Info
Article provided by Economic Studies Program, The Brookings Institution in its journal Brookings Papers on Economic Activity.

Volume (Year): 36 (2005)
Issue (Month): 2005-2 ()
Pages: 67-150
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Handle: RePEc:bin:bpeajo:v:36:y:2005:i:2005-2:p:67-150

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Related research
Keywords: macroeconomics; Productivity Growth; Inflation Dynamics; Distribution of Income;

Find related papers by JEL classification:
D31 - Microeconomics - - Distribution - - - Personal Income and Wealth Distribution
D33 - Microeconomics - - Distribution - - - Factor Income Distribution
D63 - Microeconomics - - Welfare Economics - - - Equity, Justice, Inequality, and Other Normative Criteria and Measurement
E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
I30 - Health, Education, and Welfare - - Welfare and Poverty - - - General
J30 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - General

Cited by:
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  1. Frank Levy & Peter Temin, 2007. "Inequality and Institutions in 20th Century America," NBER Working Papers 13106, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  2. Jonathan L. Willis & Julie Wroblewski, 2007. "What happened to the gains from strong productivity growth?," Economic Review, Federal Reserve Bank of Kansas City, issue Q I, pages 5-23. [Downloadable!]
  3. Enrico Moretti, 2008. "Real Wage Inequality," NBER Working Papers 14370, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  4. William Milberg, 2007. "Shifting Sources and Uses of Profits: Sustaining U.S. Financialization with Global Value Chains," SCEPA Working Papers 2007-9, Schwartz Center for Economic Policy Analysis (SCEPA), The New School. [Downloadable!]
  5. William Milberg and Deborah Winkler, 2009. "Financialization and the Dynamics of Offshoring in the U.S," SCEPA Working Papers 2009-5, Schwartz Center for Economic Policy Analysis (SCEPA), The New School. [Downloadable!]
  6. Robert J. Gordon, 2009. "Misperceptions About the Magnitude and Timing of Changes in American Income Inequality," NBER Working Papers 15351, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  7. Dew-Becker, Ian & Gordon, Robert J, 2008. "Controversies about the Rise in American Inequality: A Survey," CEPR Discussion Papers 6817, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
    Other versions:
  8. Ian Dew-Becker, 2008. "How Much Sunlight Does it Take to Disinfect a Boardroom? A Short History of Executive Compensation Regulation," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
  9. Roine, Jesper & Waldenström, Daniel, 2006. "The Evolution of Top Incomes in an Egalitarian Society: Sweden, 1903–2004," Working Paper Series in Economics and Finance 625, Stockholm School of Economics. [Downloadable!]
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  10. George Irvin, 2007. "Inequality and the Anglo-American Economic Model," ICER Working Papers 26-2007, ICER - International Centre for Economic Research. [Downloadable!]
  11. Richard G. Harris & Peter E. Robertson, 2007. "Dynamic Adjustments to Terms of Trade Shocks: The USA Productivity Boom and Australia," Discussion Papers 2007-16, School of Economics, The University of New South Wales. [Downloadable!]
  12. Tomer Blumkin & Yossi Hadar & Eran Yashiv, 2009. "The Macroeconomic Role of Unemployment Compensation," CEP Discussion Papers dp0909, Centre for Economic Performance, LSE. [Downloadable!]
  13. Thomas Piketty & Emmanuel Saez, 2006. "The Evolution of Top Incomes: A Historical and International Perspective," NBER Working Papers 11955, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  14. Dean Baker, 2006. "The Conservative Nanny State," CEPR Books, Center for Economic and Policy Research (CEPR), number 2006-01, enero-mar. [Downloadable!]
  15. Claudia Goldin & Lawrence F. Katz, 2007. "Long-Run Changes in the U.S. Wage Structure: Narrowing, Widening, Polarizing," NBER Working Papers 13568, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  16. Roine, Jesper & Waldenström, Daniel, 2009. "Common Trends and Shocks to Top Incomes – A Structural Breaks Approach," Working Paper Series 801, Research Institute of Industrial Economics. [Downloadable!]
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