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Structural change in U.S. wage determination

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  • Robert W. Rich
  • Donald Rissmiller

Abstract

This paper provides an empirical investigation into the determinants and stability of the aggregate wage inflation process in the United States over the 1967-2000 period. Using compensation per hour as the measure of wages, we specify a Phillips curve model that links wage growth to its past values as well as to the unemployment rate, price inflation, labor productivity growth, and an additional set of labor market variables. The results do not reject the hypothesis that real wages and labor productivity move proportionally in the long run. More important, endogenous structural break tests provide little evidence of model instability. We conclude that aggregate wage determination has remained stable over the last thirty years and that any recent shift in the inflation-unemployment relationship reflects developments outside the labor market.

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Paper provided by Federal Reserve Bank of New York in its series Staff Reports with number 117.

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Date of creation: 2001
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Handle: RePEc:fip:fednsr:117
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Keywords: Inflation (Finance) ; Wages ; Labor productivity;

This paper has been announced in the following NEP Reports:

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  1. Francine D. Blau & Lawrence M. Kahn, 1992. "Race and Gender Pay Differentials," NBER Working Papers 4120, National Bureau of Economic Research, Inc.
  2. George A. Akerlof & William T. Dickens & George L. Perry, 2000. "Near-Rational Wage and Price Setting and the Long-Run Phillips Curve," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 31(1), pages 1-60.
  3. Blanchard, O & Katz, L, 1996. "What We Know and Do Not Know about the Natural Rate of Unemployment," Working papers 96-29, Massachusetts Institute of Technology (MIT), Department of Economics.
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  7. Geoffrey M.B. Tootell, 1994. "Restructuring, the NAIRU, and the Phillips curve," New England Economic Review, Federal Reserve Bank of Boston, issue Sep, pages 31-44.
  8. Cara S. Lown & Robert W. Rich, 1997. "Is there an inflation puzzle?," Research Paper 9723, Federal Reserve Bank of New York.
  9. Paul Gomme, 1998. "What labor market theory tells us about the "New Economy"," Economic Review, Federal Reserve Bank of Cleveland, issue Q III, pages 16-24.
  10. Jeffrey C. Fuhrer, 1995. "The Phillips curve is alive and well," New England Economic Review, Federal Reserve Bank of Boston, issue Mar, pages 41-56.
  11. David Lebow & Louise Sheiner & Larry Slifman & Martha Starr-McCluer, 1999. "Recent trends in compensation practices," Finance and Economics Discussion Series 1999-32, Board of Governors of the Federal Reserve System (U.S.).
  12. Hansen, Bruce E., 1992. "Testing for parameter instability in linear models," Journal of Policy Modeling, Elsevier, vol. 14(4), pages 517-533, August.
  13. Donald W.K. Andrews & Werner Ploberger, 1992. "Optimal Tests When a Nuisance Parameter Is Present Only Under the Alternative," Cowles Foundation Discussion Papers 1015, Cowles Foundation for Research in Economics, Yale University.
  14. Peter Tulip, 2000. "Do minimum wages raise the NAIRU?," Finance and Economics Discussion Series 2000-38, Board of Governors of the Federal Reserve System (U.S.).
  15. Murphy, Kevin M & Welch, Finis, 1992. "The Structure of Wages," The Quarterly Journal of Economics, MIT Press, vol. 107(1), pages 285-326, February.
  16. Todd E. Clark, 1999. "A comparison of the CPI and the PCE price index," Economic Review, Federal Reserve Bank of Kansas City, issue Q III, pages 15-29.
  17. Daniel J. B. Mitchell, 1985. "Shifting Norms in Wage Determination," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 16(2), pages 575-608.
  18. Robert J. Gordon, 1981. "Inflation, Flexible Exchange Rates, and the Natural Rate of Unemployment," NBER Working Papers 0708, National Bureau of Economic Research, Inc.
  19. Budd, J.W. & Nho, Y., 1995. "Testing for a Structurak Change in U.S. Wage Determination," Papers 95-03, Minnesota - Industrial Relations Center.
  20. Robert W. Rich & Donald Rissmiller, 2000. "Understanding the recent behavior of U.S. inflation," Current Issues in Economics and Finance, Federal Reserve Bank of New York, vol. 6(Jul).
  21. Flint Brayton & John M. Roberts & John C. Williams, 1999. "What's happened to the Phillips curve?," Finance and Economics Discussion Series 1999-49, Board of Governors of the Federal Reserve System (U.S.).
  22. Wayne Vroman & John M. Abowd, 1988. "Disaggregated Wage Developments," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 19(1), pages 313-346.
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