Wage and Price Change Relationships in Post-War Canada

Abstract

where the as are coefficients, the dot operators denote percentage rate of change, quarter-to-quarter,2 and where the asterisks denote distributed lags.3 W, PQ, Pc, and U-2 are average hourly earnings in manufacturing, wholesale prices of fully and chiefly manufactured goods times real output in manufacturing (the value of output), the consumer price index, and the squared reciprocal of percentage unemployment.4 Equation 1.ii sets al = 0 to obtain the standard Phillips wage equation. Equation 1.iii sets a3 = 0 to obtain a model similar to that advanced by McGuire and Rapping (1968). The PQ term is a proxy variable for percentage changes in the demand price of labour, and is derived from a Cobb-Douglas production function, while P, reflects the supply side of the market, since labour exerts pressure to be compensated for inflation. In the absence of money illusion on either side of the market, a given percentage change in price induces vertical shifts of the demand and supply curves (measured against money wages), and hence a change in money wages, all of the same percentage amount. Productivity increases affect wages both through the demand for labour, represented by PQ, and through the pressure by labour to share the benefits of productivity increases, which is reflected in the constant term, ao.