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

Author

Listed:
  • Ian Dew-Becker

    (Northwestern University)

  • Robert J. Gordon

    (Northwestern University)

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.

Suggested Citation

  • Ian Dew-Becker & Robert J. Gordon, 2005. "Where Did Productivity Growth Go? Inflation Dynamics and the Distribution of Income," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 36(2), pages 67-150.
  • Handle: RePEc:bin:bpeajo:v:36:y:2005:i:2005-2:p:67-150
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    macroeconomics; Productivity Growth; Inflation Dynamics; Distribution of Income;

    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, Well-Being, and Poverty - - - General
    • J30 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - General

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