Lee Jackson - Final Thesis - Economics - Stanford University

productivity in the tradable sector should result in a one-for-one increase (decrease) in the wages
of both tradable and non-tradable workers. Such a one-for-one relationship between productivity
and wage growth is ideal, because it maintains a competitive balance of unit labor costs between
countries with relatively high productivity growth, like past Japan and recent China, and
countries with relatively low productivity growth, like the U.S. But as we observe in practice,
such a one-for-one relationship between productivity and wage growth does not always hold, and
competitive imbalances can ensue (see Tables 2.1 and 2.2).
What causes the one-for-one relationship between productivity and wage growth to break
down in practice? A shortcoming of the Scandinavian model is that it does not account for
expected changes in exchange rates. Per Equations (2.2) and (2.3), the Scandinavian model
recognizes that present exchange rate changes have a one-for-one impact on the tradable price
Table 2.1: Average Annual Percentage
Change of Key Economic Indicators in
the U.S. and Japan from 1950-71
Statistic U.S. Japan
Wholesale Prices 1.63 0.69 a
Money Wages 4.52 10.00
Consumer Prices 2.53 5.01
Industrial
Production
4.40 14.56
Real GDP 3.84 9.45 a
Nominal GDP 6.79 14.52 a
Narrow Money 3.94 16.10 b
Labor Productivity 2.55 8.92 c
Sources: IMF (2012), Japan
a 1952-1971
Economic Yearbook (1960-71),
b 1953-1971
c 1951-1971
Economic Survey of Japan (1954-59),
and OECD Economic Surveys:
Japan (1964-71)
12
Table 2.2: Average Annual Percentage
Change of Key Economic Indicators in
the U.S. and China from 1995-2010
Statistic U.S. China
Producer Prices 2.81 1.95
Money Wages 2.50 10.41
Consumer Prices 2.45 2.97
Industrial
Production
2.03 13.42
Real GDP 2.48 9.93
Nominal GDP 4.61 13.88
Narrow Money 3.06 17.49
Labor Productivity 5.25 15.75
Sources: IMF (2012), NBS (2011),
and U.S. Bureau of Labor Statistics