The hypothesis of structural inflation

Abstract

Whereas the Phillips curve model and the monetarist theory of inflation are concerned with the problem of inflation in the narrow sense of the word, the structural hypothesis attempts to explain the long-run trend in Western economies of rising price levels. The idea of linking the long-run tendency toward inflation to structural factors dates back to the work of P. Streeten (1962) and W. Baumol (1967). More recently G. Maynard and W. v. Ryckeghem (1976) carefully formulated this hypothesis and empirically tested it for a series of OECD countries. The long-run inflationary tendency is traced to the interaction of four factors, which are partly technological and partly behavioral. They constrict the operation of the market mechanism. The factors are Differences in productivity in the industrial and service sectors. A uniform rate of growth of money wages in both sectors. Different price and income elasticities for the output of the industrial and service sectors. Limited flexibility of prices and wages; that is, wages and prices are rigid in a downward direction. “Structural” models are characterized by the assumption that economic activity can be aggregated into two sectors; a “progressive” (industrial) sector and a “conservative” (service) sector. Given different rates of productivity growth in the industrial and service sectors, a uniform rate of growth of money wages throughout the economy must lead to permanent cost pressures in the service sector, which is assumed to have the lower productivity growth.