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Empirical Structural Evidence On Wages, Prices and Employment in the US

Listed author(s):
  • Olivier J. Blanchard

In this paper, I investigate US post war price, wage and employment dynamics by identifying and estimating a price and a wage equation. I reach the following two main conclusions: Nominal wages adjust faster to prices than prices do to nominal wages. This may be taken as evidence that price inertia is more important empirically than nominal wage inertia. The wage equation implies that the effect on wage inflation of a permanent increase in unemployment, given prices, is largely temporary. This can be interpreted in various ways. One is that, if the wage equation is interpreted as a Phillips curve, both the rate of change and the level of unemployment play an important role in wage determination. The methodology of the paper is somewhat different from the traditional approach to the estimation of price and wage equations. Its spirit is to impose on the reduced form a just identifying set of restrictions. In this way, a structural interpretation is made possible, while the data are left free to speak.

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Paper provided by Massachusetts Institute of Technology (MIT), Department of Economics in its series Working papers with number 431.

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Date of creation: Sep 1986
Handle: RePEc:mit:worpap:431
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MASSACHUSETTS INSTITUTE OF TECHNOLOGY (MIT), DEPARTMENT OF ECONOMICS, 50 MEMORIAL DRIVE CAMBRIDGE MASSACHUSETTS 02142 USA

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Web page: http://econ-www.mit.edu/

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  1. Sargent, Thomas J, 1978. "Estimation of Dynamic Labor Demand Schedules under Rational Expectations," Journal of Political Economy, University of Chicago Press, vol. 86(6), pages 1009-1044, December.
  2. Joseph G. Altonji, 1982. "The Intertemporal Substitution Model of Labour Market Fluctuations: An Empirical Analysis," Review of Economic Studies, Oxford University Press, vol. 49(5), pages 783-824.
  3. John B. Taylor, 1986. "Improvements in Macroeconomic Stability: The Role of Wages and Prices," NBER Chapters,in: The American Business Cycle: Continuity and Change, pages 639-678 National Bureau of Economic Research, Inc.
  4. Kennan, John, 1988. "An Econometric Analysis of Fluctuations in Aggregate Labor Supply and Demand," Econometrica, Econometric Society, vol. 56(2), pages 317-333, March.
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