Money Wage Inflation in Industrial Countries

Abstract

The rate of growth of money wages is the outcome of a complex combination of social and economic forces, the relative importance of the elements of which varies from time to time, and from one country to another. Accordingly there has been a proliferation of theories of inflation. This paper is concerned with the extent to which empirical support for just one of these theories, the so-called key-industry hypothesis, may be found in the characteristics of money-wage inflation in fifteen industrial countries, in all of which the structural relationships underlying the determination of money wages were oligopolistic product markets, strong trade unions and reasonable aggregate stability near full employment. The forces which cause inflation may be divided into two groups. In the first group may be placed those factors called, for the purposes of this paper, special effects , which occur relatively infrequently, and, in general, have a once-and-for-all effect (although that effect may reverberate for some time). Examples are a devaluation, which by raising the prices of imported goods leads to upward pressure on money wages as unions seek to restore the real wages of their members; severe social conflict such as that in France in May 1968; and significant changes in the degree of state intervention in the wage-bargaining process. In the second category belong those forces which are believed to exert a systematic influence on the course of money wages, linking the rate of money wage inflation to the behaviour of particular economic, social or political variables. Empirical analyses designed to detect forces of the second type have typically concentrated on examination of the explanatory power of various aggregate statistics with respect to the rate of change of the average level of money wages (or in studies of price inflation, the average price level). Such investigations assume a considerable degree of behavioural uniformity across the diverse sectors of the economy. But the results of crosssection studies designed to detect sectoral determinants of wage inflation have, in general, failed to find any systematic elements underlying wage inflation in individual industries.3 One consistent characteristic of money-wage changes by sector that has emerged, however, is a high degree of uniformity in the rates of increase of earnings across all sectors of the economy, particularly across aU sectors of manufacturing.4 This inter-sectoral homogeneity in the face of the heterogeneity of most other (apparently relevant) variables