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MICROECONOMIC CHANGES AND MACROECONOMIC
WAGE DlSlNFLATlON IN THE 1980s
James H. Chan-Lee, David T. Coe and Menahem Prywes
CONTENTS
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 122
1. Microeconomic policies and institutional changes affecting the labour
market . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 125
A. Changes in government microeconomic policies related to social
protection . . . . . . . . . . . . . . . . . . . . . . . . . . . 125
B. Changes in other government microeconomic policies . . . . . 132
C. Changes in indexation procedures and wage setting practices . 134
II. How have these microeconomic and institutional changes affected
wage developments at the macroeconomic level? . . . . . . . . . 135
A. Microeconomic changes and aggregate wage equations . . . . 135
8. The stability of aggregate wage equations in the 1980s . . . 140
Policy implications . . . . . . . . . . . . . . . . . . . . . . . . . . . 145
Appendix . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 150
Bibliography . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 156
The authors are members of the General Economics Division of the Economics and Statistics Department.
They wish to thank Jeffrey Shafer, Axe1 Mittelstedt and their colleagues in the Country Studies Branch of the
Economics and Statistics Department.
121
INTRODUCTION
The past six years have seen the most sustained period of wage and price
/-
disinflation since the Korean War. Unlike developments after the first oil price shock,
when wage growth contributed to high inflation, nominal wage moderation has been
an important factor behind the disinflation of the 1980s (Chart A): average nominal
pay increases in the seven largest OECD economies accelerated to 10% per cent
immediately after the second oil price shock but dropped to below 4per cent
by 1986.
A number of factors contributed to rapid wage disinflation. The overall stance
of macroeconomic, particularly monetary, policies did not accommodate the second
large oil price increase. Unemployment rates rose sharply and oil and non;oil
commodity prices fell. In addition, there was renewed emphasis on enhancing
supply-side flexibility and structural adjustment through microeconomic policies.
These policies were advocated partly for the support they could offer to the
anti-inflationary stance of macroeconomic policy.
These developments suggest a number of questions about microeconomic
policy changes and aggregate wage behaviour: i) What have been the important
changes since 1 980 in government microeconomic and regulatory policies affecting
the labour market, or in wage setting practices; and ii) How have these changes
affected aggregate wage developments or the response of wages to economic
events? These are the questions addressed in this paper.
The paper is organised as follows: Section I presents a cross-country survey of
changes in labour market regulatory policies and wage bargaining arrangements.
The number of new developments in these areas has been impressive and has
generally been consistent with the goal of enhancing the flexibility of labour markets;
but for any single country most of the changes have been relatively modest and
comparatively recent. In
a number of important areas, however, such as increases in
social-security costs and the generosity of unemployment insurance systems and
minimum wages, trends established in the 1960s and 1970s appear to have been
decisively halted, or even reversed. Section II discusses how these microeconomic
or institutional changes might affect aggregate wage developments and assesses
the quantitative significance of these changes in the context of empirically-estimated
wage equations for thirteen QECD economies. There is some evidence that
122
CHART A
WAGE GROWTH, INFLATION AND UNEMPLOYMENT
- Wage growth, private sector
-----------.. Growth of the private consumption deflator
Unemployment rate
Per cent United States Per cent Per cent Japan Per cent
12 12 30 - - 30
10
8
6 6 15 - :. - 15
4 4 10 - , -.. - 10
--._ ... : *
2 2 5- -5
I
-_ -- ~
0 70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 0 0
'lOrJ;721sj7d7~7617~7817~8d81'82r8~8685
Per cent Germany Per cent Per cent France Per cent
12 18
10 16
14
8 12
6 10
8
4 6
2 4
2
70 71 72 73 14 75 76 77 78 79 80 81 82 83 84 85 0 70 71 72 73 74 75 76 77 78 79 80 8t 82 83 84 85
Pei cent United Kingdom Per cent Per cent Italy Per cent
30 30 30 r
25 25
20 20
15 15
10 10
5 5
0 70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 0
123
CHART A (continued)
WAGE GROWTH, INFLATION AND UNEMPLOYMENT
Per cent Canada Per cent Per cent Australia Per cent
l6 r 1 16 30 r 1 30
Per cent Austria Per cent Per cent Finland Per cent
16 - - 16 25 r 1 25
- 14
- 12 20
- 10 15
10
4- 5
0
70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85
Per cent Netherlands Per cent Per cent Spain Per cent
16 30 30
14 25 25
12 20 20
10
8 15 15
6 10 10
4 5 5
2
70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 0 70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 0
Per cent Per cent Per cent =witzedand Per cent
- Sweden - - - 14
14 14 14
10
-8
-6
4- 4 A'
2- -2
70 71 12 73 74 75 76 77 78 74 80 81 82 83 84 85 0
124
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