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

  • Ian Dew-Becker

    (Northwestern University)

  • Robert J. Gordon

    (Northwestern University)

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/~/media/Files/Programs/ES/BPEA/2005_2_bpea_papers/2005b_bpea_dewbecker.pdf
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Article provided by Economic Studies Program, The Brookings Institution in its journal Brookings Papers on Economic Activity.

Volume (Year): 36 (2005)
Issue (Month): 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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  1. David Card & John E. DiNardo, 2002. "Skill Biased Technological Change and Rising Wage Inequality: Some Problems and Puzzles," NBER Working Papers 8769, National Bureau of Economic Research, Inc.
  2. Robert J. Gordon, 1975. "Alternative Responses of Policy to External Supply Shocks," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 6(1), pages 183-206.
  3. Robert M. Solow, 1956. "A Contribution to the Theory of Economic Growth," The Quarterly Journal of Economics, Oxford University Press, vol. 70(1), pages 65-94.
  4. Robert H. Topel, 1997. "Factor Proportions and Relative Wages: The Supply-Side Determinants of Wage Inequality," Journal of Economic Perspectives, American Economic Association, vol. 11(2), pages 55-74, Spring.
  5. Andrew Atkeson & Lee E. Ohanian, 2001. "Are Phillips curves useful for forecasting inflation?," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Win, pages 2-11.
  6. Katharine Bradbury & Jane Katz, 2002. "Issues in economics: are lifetime incomes growing more unequal?: looking at new evidence on family income mobility," Regional Review, Federal Reserve Bank of Boston, issue Q 4, pages 2-5.
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