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

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  • Olivier J. Blanchard

Abstract

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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Suggested Citation

  • Olivier J. Blanchard, 1986. "Empirical Structural Evidence On Wages, Prices and Employment in the US," Working papers 431, Massachusetts Institute of Technology (MIT), Department of Economics.
    • Handle: RePEc:mit:worpap:431
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    References listed on IDEAS

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    1. Joseph G. Altonji, 1982. "The Intertemporal Substitution Model of Labour Market Fluctuations: An Empirical Analysis," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 49(5), pages 783-824.
    2. Kennan, John, 1988. "An Econometric Analysis of Fluctuations in Aggregate Labor Supply and Demand," Econometrica, Econometric Society, vol. 56(2), pages 317-333, March.
    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. R. Layard & S. Nickell, 1985. "The Causes of British Unemployment," National Institute Economic Review, National Institute of Economic and Social Research, vol. 111(1), pages 62-85, February.
    5. 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.
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    Cited by:

    1. Robert J. Gordon, 1988. "U.S. Inflation, Labor's Share, and the Natural Rate of Unemployment," NBER Working Papers 2585, National Bureau of Economic Research, Inc.
    2. Robert J. Gordon, 1991. "Productivity, Wages, and Prices Inside and Outside of Manufacturing in the U.S., Japan, and Europe," NBER Chapters, in: International Volatility and Economic Growth: The First Ten Years of The International Seminar on Macroeconomics, pages 153-207, National Bureau of Economic Research, Inc.
    3. Carl E. Walsh, 1987. "The Impact of Monetary Targeting in the United States: 1976-1984," NBER Working Papers 2384, National Bureau of Economic Research, Inc.

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