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Productivity, Wages and Prices Inside and Outside of Manufacturing in the US, Japan and Europe

  • Gordon, Robert J

This paper studies the dynamic behaviour of changes in productivity, wages, and prices. Results are based on a new data set that allows a consistent analysis of the aggregate economy, the manufacturing sector, and the non-manufacturing sector. Results are presented for the United States, Japan, and an aggregate called "Europe" consisting of eleven European economies. The primary theme of the paper is that the differences between Europe and the United States have been substantially exaggerated in recent work. Europe has neither greater nominal wage flexibility nor more rigid real wages than the United States. Evidence that the United States exhibits more nominal rigidity is confined to manufacturing, while the United States aggregate and non-manufacturing sectors display as much nominal wage flexibility as Europe, and similar "output sacrifice ratios" as well. These results undermine the case frequently made against demand expansion in Europe namely that as a result of a uniquely vertical European aggregate supply curve, such a demand expansion would only create more inflation without bringing any of the benefits of increased output. The analysis of real wages also yields new results. A consistent treatment of the income of the self-employed almost completely eliminates the secular increase between the 1960s and 1980s in the wage gap indices for Japan and Europe. If anything, real wages in Europe and Japan were too flexible rather than too rigid, in the sense that much of the increase in wage gap indices in Europe during 1968-70 and in Japan in 1973-74 can be interpreted as autonomous wage push. Only a very small part of the increase in the wage gap can be attributed to a failure of real wages to respond to the post-1972 productivity growth slowdown. The paper's analysis of productivity change confirms the real-wage elasticity of labour input emphasized previously, but shows that the response of productivity to changes in the real wage, and to cyclical output fluctuations, is roughly the same the United States, Japan, and Europe. The cyclical analysis allows an estimate of trend productivity growth, revealing interesting differences between the manufacturing and non-manufacturing sectors in the three economies.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 134.

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Date of creation: Oct 1986
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Handle: RePEc:cpr:ceprdp:134
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  1. Robert J. Gordon, 1985. "Understanding Inflation in the 1980s," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 16(1), pages 263-302.
  2. Hamada, Koichi & Kurosaka, Yoshio, 1984. "The relationship between production and unemployment in Japan : Okun's law in comparative perspective," European Economic Review, Elsevier, vol. 25(1), pages 71-94, June.
  3. Olivier J. Blanchard, 1986. "Empirical Structural Evidence on Wages, Prices and Employment in the US," NBER Working Papers 2044, National Bureau of Economic Research, Inc.
  4. Branson, William H. & Rotemberg, Julio J., 1980. "International adjustment with wage rigidity," European Economic Review, Elsevier, vol. 13(3), pages 309-332, May.
  5. Grubb, David B, 1986. "Topics in the OECD Phillips Curve," Economic Journal, Royal Economic Society, vol. 96(381), pages 55-79, March.
  6. Jacques R. Artus, 1984. "An Empirical Evaluation of the Disequilibrium Real Wage Rate Hypothesis," NBER Working Papers 1404, National Bureau of Economic Research, Inc.
  7. Franz, Wolfgang & Konig, Heinz, 1986. "The Nature and Causes of Unemployment in the Federal Republic of Germany since the 1970s: An Empirical Investigation," Economica, London School of Economics and Political Science, vol. 53(210(S)), pages S219-44, Supplemen.
  8. Robert J. Gordon, 1977. "World Inflation and Monetary Accommodation in Eight Countries," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 8(2), pages 409-478.
  9. George L. Perry, 1975. "Determinants of Wage Inflation Around the World," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 6(2), pages 403-448.
  10. Tullio, Giuseppe, 1987. "Long run implications of the increase in taxation and public debt for employment and economic growth in Europe," European Economic Review, Elsevier, vol. 31(3), pages 741-774, April.
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