Post on 30-Dec-2015
description
1
1Sidney Weintraub. “A Tax-Based Incomes Policy,” Journal of economic Issues, June 1971.
Initial points:
Inflation is partly the consequence of the never ending struggle over the distribution of income between various groups--e.g., unionized workers, professionals, retirees, public sector employees, and so forth.
As these groups seek to raise their incomes, money income can get ahead of productivity growth--putting upward pressure on unit labor costs.
The key to understanding inflation is in understanding the relationship between average money income and average labor productivity.
Definitions
P : Price levelQ : Real outputY1 : Gross business product (Gross money
income)N : Number of persons employedy 2: Average money income(y = Y/N)A : Average product of labor (A = Q/N)w : Average (money) wagek: Average markup over unit labor cost
1Omits nonprofit activities of households, government agencies, and nonprofit institutions.
2Includes wages, profits, salaries, rents, interest, business taxes, and depreciation.
The Model
YPQ (1)
Therefore,
Q
YP (2)
Divide Y and Q by N to obtain:
NQ
NYP
/
/ (3)
Now rewrite (3) to obtain:
A
yP (4)
Equation (4) tells usthat the price level is
determined by the ratioof average moneyincome to average
productivity
AAyyQQYYPP ///// (5)
Equation (5) indicates that the price level must rise if the rate of increase of ave. money income exceeds the rate of increase of labor productivity. We now focus on the relationship between money wages and labor productivity.
kwNPQY (6)
That is, gross money income is equal to the mark-up over unit labor cost (ULC) times the average money wage times the number of persons employed. Unit labor cost is defined as:
AwUCL /
The Wage Cost mark-up equation is written as follows:
P = kw/A (8)
(7)
Employment Cost Index, Private Industry
June, 1989 = 100
U.S., 1985-97
Source: Economic Report of the President, Table B-48
Year
97969594939291908988878685
150145140135130125120115110105100959085807570
Wages and
Salaries
Benefits
Percent Change in Private Employment Cost, 1986-97
U.S. , from the previous year
Source: Economic Report of the President, Table B-48
Year
979695949392919089888786
Perc
en
t
7
6
5
4
3
2
1
Wages and
Salaries
Benefits
Private Employment Cost Index, 1986-97
June, 1989 = 100
Source: Economic Report of the President, Table B-48
Year
97969594939291908988878685
140
135
130
125
120
115
110
105
100
95
90
8580
135
131127
124120
116112
107
102
98
9390
87
Annual Percent Change In Productivity, Compensation, and Unit Labor Cost
U.S., 1971-83
Source: Economic Report of the President, Table B-49
Year
83828180797877767574737271
12
10
8
6
4
2
0
-2
-4
Output per hour
Compensation
per hour
Unit labor cost
Productivity, Compensation, and Unit Labor Cost, 1988-97
1992 = 100
Source: Economic Report of the President, 1998
YEAR
1997199619951994199319921991199019891988
120
110
100
90
80
Productivity
Hourly compensation
Unit Labor Cost
Productivity, Compensation, and Unit Labor Cost in the U.S., 1989-97
This is a type of cost-push inflation
Profit-Push Inflation: If ULC remains constant, equation (8) indicates that the price level can only rise if k increases. Most studies indicate that k is remarkably stable over time (though the time path of k differs across industries).
Wage and Salary-Push Inflation:Wage and Salary-Push inflation arises from an increase in ULC over time.
2 sub-types
. Incomes policies are
designed to tie increases in
nominal wage and salary compensation to
increases in labor productivity through
the use of tax incentives