A Note on Wage Drift. The Case of Sweden

Abstract

In a previous study on wages and prices in Sweden, Jacobsson & Lindbeck (1969) were unable to show that prices influenced the formation of wages. In explaining negotiated wage changes as well as the rate of wage drift, they employed the consumer price index (CPI). However, if the supply of labor is inelastic in the short run, and if the wage rate is determined by the value of labor's marginal productivity, the relevant price variable in a wage drift equation is an output price index (rather than the CPI). Using a price index for manufactured products, it is shown here that wage drift is significantly affected by price developments. An upward shift of wage drift in the early 1970s, which is difficult to explain in terms of labor market variables (Lindbeck, 1975), is most likely due to the sharp rise in output prices during this period. Money earnings for workers in Swedish manufacturing consistently exceed the wage agreements arrived at through collective bargaining. These additional increases in earnings are called wage drift; see Hansen & Rehn (1956), p. 88. In this note some comments are offered on the four hypotheses for wage movements suggested in an earlier study by Jacobsson & Lindbeck, (1969, hereafter referred to as J&L). In the J&L study, which covered the period 1955-1967, only the labor market variable had a significant influence on wage changes collective agreements as well as wage drift2 (p. 64).