Structural Change in U.S. Wage Determination

Abstract

--This paper provides an empirical investigation into the determinants and stability of the aggregate wage inflation process in the United States over the 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 importantly, 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. Gomme (1998) also provides an investigation into the "New Economy" paradigm and its 1 implications for labor market behavior.The U.S. economy has performed remarkably well over the last decade. The current expansion, which started in April 1991, is the longest in the post-war period. In addition to its surprising longevity, this boom has been characterized by the unusual coincidence of declining unemployment and declining price inflation. While there is a consensus that the combination of sustained growth, low unemployment and falling inflation is an impressive economic accomplishment, there has been considerable debate over the factor(s) responsible for the confluence of these favorable occurrences.Some commentators claim that the recent coexistence of low unemployment and low price inflation --the so-called "inflation puzzle" --is a consequence of changes in the labor market.Gordon (1997) constructs time-varying estimates of the non-accelerating inflation rate of unemployment (NAIRU) and reports a marked and steady decline in its value during the 1990s.Katz and Krueger (1999) cite evidence of restraint in wage growth since 1988 and argue that this development is primarily due to demographic shifts and the rise of labor market intermediaries.Akerlof, Dickens and Perry (2000) appeal to the concept of near-rational behavior and the idea that agents/firms may entirely ignore inflation or only partially incorporate inflationary expectations into wage (and price) setting decisions in a low inflation environment. While displaying some differences, these studies link recent trends in employment and price inflation to structural change in the labor market and instability in the wage inflation process. 1The changing nature of U.S. wage determination has been the focus of previous research.For example, studies have analyzed changes in the relative wage structure [Bound and Johnson (1992), Murphy and Welch (1992)], increased income inequality [DiNardo, Fortin, and Lemieux 2 (1996)], changing wage gaps between demographic groups [Blau and Kahn (1992)] and changes in union wage determination [Mitchell (1994)]. Moreover, interest in the stability of aggregate wage determination did...

Do Minimum Wages Raise the NAIRU?

“…However, given that a small negative value of β is well established (see for example Layard et al, 1991, p.199, or the many references cited by Robert W. Rich and Donald Rissmiller, 2001), I am especially interested in estimates of δ* -the contribution of the minimum wage to nominal wage growth. Then the fundamental parameter of interest is δ*/β -the contribution of the minimum wage to the NAIRU.…”

“…See, for example, those listed by Rich and Rissmiller (2001). See, for example, those listed by Rich and Rissmiller (2001).…”