IDEAS home Printed from https://ideas.repec.org/p/nbr/nberwo/6924.html
   My bibliography  Save this paper

Wage Dynamics: Reconciling Theory and Evidence

Author

Listed:
  • Olivier Jean Blanchard
  • Lawrence Katz

Abstract

U.S. macroeconomic evidence shows a negative relation between the rate of change of wages and unemployment. In contrast, most theories of wage determination imply a negative relation between the level of wages and unemployment. In this paper, we ask whether one can reconcile the empirical evidence with theoretical wage relations. We reach three main conclusions. First, we derive the condition under which the two can indeed be reconciled. We show the constraints that such a condition imposes on the determinants of workers' reservation wages as well as the relative importance of workers' outside options as opposed to match specific productivity in wage determination. Second, in the light of this condition, we reinterpret the presence of an "error correction" term in macroeconomic wage relations for most European economies but not in the United States. Third, we show that whether this condition holds or not has important implications for the effects of a number of variables -- from real interest rates to oil prices to payroll taxes -- on the natural rate of unemployment.

Suggested Citation

  • Olivier Jean Blanchard & Lawrence Katz, 1999. "Wage Dynamics: Reconciling Theory and Evidence," NBER Working Papers 6924, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:6924
    Note: LS
    as

    Download full text from publisher

    File URL: http://www.nber.org/papers/w6924.pdf
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Mortensen, Dale & Pissarides, Christopher, 2011. "Job Creation and Job Destruction in the Theory of Unemployment," Ekonomicheskaya Politika / Economic Policy, Russian Presidential Academy of National Economy and Public Administration, vol. 1, pages 1-19.
    2. David G. Blanchflower & Andrew J. Oswald, 1995. "The Wage Curve," MIT Press Books, The MIT Press, edition 1, volume 1, number 026202375x, April.
    3. Jeff Fuhrer & George Moore, 1995. "Inflation Persistence," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 110(1), pages 127-159.
    4. Abowd, John M. & Kramarz, Francis & Margolis, David N. & Troske, Kenneth R., 2001. "The Relative Importance of Employer and Employee Effects on Compensation: A Comparison of France and the United States," Journal of the Japanese and International Economies, Elsevier, vol. 15(4), pages 419-436, December.
    5. Fuhrer, Jeffrey C., 2010. "Inflation Persistence," Handbook of Monetary Economics, in: Benjamin M. Friedman & Michael Woodford (ed.), Handbook of Monetary Economics, edition 1, volume 3, chapter 9, pages 423-486, Elsevier.
    6. David Card & Dean Hyslop, 1997. "Does Inflation "Grease the Wheels of the Labor Market"?," NBER Chapters, in: Reducing Inflation: Motivation and Strategy, pages 71-122, National Bureau of Economic Research, Inc.
    7. Karl Whelan, 1997. "Wage Curve vs. Phillips Curve : are there macroeconomic implications?," Open Access publications 10197/246, School of Economics, University College Dublin.
    8. repec:bla:scandj:v:92:y:1990:i:2:p:215-35 is not listed on IDEAS
    9. Shapiro, Carl & Stiglitz, Joseph E, 1984. "Equilibrium Unemployment as a Worker Discipline Device," American Economic Review, American Economic Association, vol. 74(3), pages 433-444, June.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Giorgio Fagiolo & Giovanni Dosi & Roberto Gabriele, 2005. "Towards an evolutionary interpretation of aggregate labor market regularities," Springer Books, in: Uwe Cantner & Elias Dinopoulos & Robert F. Lanzillotti (ed.), Entrepreneurships, the New Economy and Public Policy, pages 223-252, Springer.
    2. Daniel Aaronson & Daniel G. Sullivan, 2000. "Recent evidence on the relationship between unemployment and wage growth," Working Paper Series WP-00-27, Federal Reserve Bank of Chicago.
    3. Jean Farès, 2002. "Does Micro Evidence Support the Wage Phillips Curve in Canada?," Staff Working Papers 02-4, Bank of Canada.
    4. Víctor M. Montuenga‐Gómez & José M. Ramos‐Parreño, 2005. "Reconciling the Wage Curve and the Phillips Curve," Journal of Economic Surveys, Wiley Blackwell, vol. 19(5), pages 735-765, December.
    5. Givens, Gregory E., 2011. "Unemployment insurance in a sticky-price model with worker moral hazard," Journal of Economic Dynamics and Control, Elsevier, vol. 35(8), pages 1192-1214, August.
    6. Daniel Aaronson & Daniel G. Sullivan, 2000. "Unemployment and wage growth: recent cross-state evidence," Economic Perspectives, Federal Reserve Bank of Chicago, vol. 25(Q II), pages 41-54.
    7. Blanchflower, David G. & Oswald, Andrew J., 2006. "The Wage Curve: An Entry Written for the New Palgrave, 2nd Edition," IZA Discussion Papers 2138, Institute of Labor Economics (IZA).
    8. Patrick A. Puhani, 2000. "On the Identification of Relative Wage Rigidity Dynamics," William Davidson Institute Working Papers Series 343, William Davidson Institute at the University of Michigan.
    9. Christoffel, Kai & Linzert, Tobias, 2005. "The Role of Real Wage Rigidity and Labor Market Frictions for Unemployment and Inflation Dynamics," IZA Discussion Papers 1896, Institute of Labor Economics (IZA).
    10. James M. Malcomson & Sophocles Mavroeidis, 2007. "Matching Frictions, Efficiency Wages, and Unemployment in the USA and the UK," Working Papers 2007-02, Brown University, Department of Economics.
    11. Olivier Blanchard & Lawrence F. Katz, 1997. "What We Know and Do Not Know about the Natural Rate of Unemployment," Journal of Economic Perspectives, American Economic Association, vol. 11(1), pages 51-72, Winter.
    12. Richard K. Crump & Stefano Eusepi & Marc Giannoni & Aysegul Sahin, 2019. "A Unified Approach to Measuring u," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 50(1 (Spring), pages 143-238.
    13. David G. Blanchflower & Andrew J. Oswald, 2005. "The Wage Curve Reloaded," NBER Working Papers 11338, National Bureau of Economic Research, Inc.
    14. Jean‐Pierre Danthine & André Kurmann, 2007. "The Macroeconomic Consequences of Reciprocity in Labor Relations," Scandinavian Journal of Economics, Wiley Blackwell, vol. 109(4), pages 857-881, December.
    15. PUHANI Patrick A., 2000. "On the Identification of Relative Wage Rigidity Dynamics A Proposal for a Methodology on Cross-Section Data and Empirical Evidence for Poland in Transition," IRISS Working Paper Series 2000-11, IRISS at CEPS/INSTEAD.
    16. Robert G Murphy & Adam Rohde, 2018. "Rational Bias in Inflation Expectations," Eastern Economic Journal, Palgrave Macmillan;Eastern Economic Association, vol. 44(1), pages 153-171, January.
    17. Farmer, Roger E.A., 2000. "Two New Keynesian Theories Of Sticky Prices," Macroeconomic Dynamics, Cambridge University Press, vol. 4(1), pages 74-107, March.
    18. Wieland, Volker & Cwik, Tobias & Müller, Gernot J. & Schmidt, Sebastian & Wolters, Maik, 2012. "A new comparative approach to macroeconomic modeling and policy analysis," Journal of Economic Behavior & Organization, Elsevier, vol. 83(3), pages 523-541.
    19. Driscoll, John C. & Holden, Steinar, 2014. "Behavioral economics and macroeconomic models," Journal of Macroeconomics, Elsevier, vol. 41(C), pages 133-147.
    20. Peter Nijkamp & Jacques Poot, 2005. "The Last Word on the Wage Curve?," Journal of Economic Surveys, Wiley Blackwell, vol. 19(3), pages 421-450, July.

    More about this item

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • J64 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment: Models, Duration, Incidence, and Job Search

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:nbr:nberwo:6924. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: the person in charge (email available below). General contact details of provider: https://edirc.repec.org/data/nberrus.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.