Energy price shocks in the 1970s: Impact on industrialized economies

Abstract

The energy price increases in the 1970s profoundly affected the major macroeconomic variables in the economies of the industrialized world. This article measures the magnitude of the effect of the 1973 energy price shock on the economies of the USA, Canada, the UK, Germany and France. A short-run model of aggregate supply is developed, estimated and tested for overall performance, and then calibrated to the experience of the 1973–1979 period. A positive feature of the model is that it adopts a generalized multisector framework in which an energy sector is explicitly introduced in construction of the aggregate supply function. The model also heeds labour market rigidities. According to the model, the 1973 leap in energy prices generated a major inflationary impulse in all of the countries studied. The effects on labour productivity, real wages, capital utilization rate, and energy consumption were also found to be considerable and, to a large degree, similar. An interesting result concerning labour demand is that higher energy prices led to substitution of labour-intensive methods of production for energy-intensive ones, raising the magnitude of the labour/output ratio.