"Life Cycle" Hypothesis of Saving: Aggregate ... - Arabictrader.com

The Shameful Rate of Unemployment in the EMS 243
Table 8.1
Growth of Output, Productivity, Employment, and Real Wage—Europe and U.S.A. 1960–1990
Annual Rates of Growth, %
Europe
U.S.A.
GND 3.3 3.0
Real Wage 2.9 1.1
Employment 0.3 1.9
Productivity 3.0 1.2
Change in Labor Share -0.1 -0.1
share of income. But the change in productivity clearly is not directly affected
by labor nominal wage demands, while the change in the share of income is the
reciprocal of the “mark-up” which is at the core of employers’ price policy.
Now suppose that price behavior reflects a policy of a relatively stable markup
on unit labor cost, or that for any other reason, the share of labor is relatively
stable, as it has been in the U.S. and to a good extent also in Europe (whether
because of a stable mark-up of for any other reason). Then the differential growth
of the real wage in each region should (i) coincide, as it does, with the differential
growth of productivity; and (ii) be the result of that differential rather than
of differential union power. In addition, if the growth of the real wage coincides
with the growth of productivity, then the three propositions of Drèze are no longer
valid and the differential growth of the real wage can no longer be used to explain
the different growth of employment.
But is it not possible that in the face of a strong wage push, firms might find
it impossible to set a price that will maintain the mark-up? In principle this possibility
exists and circumstances in which it may actually materialize are discussed
below in section 5.1. Two possible scenarios are developed there. The first
is the case of fixed exchange rates, where raising the price results in a loss of
foreign and domestic markets. Here firms may choose to sacrifice some mark-up
while still losing some sales, output and employment. An analogous situation
could arise in the presence of a rigidly non-accommodating monetary policy.
However, these situations are characterized by the fact that the rise of the real
wage above that of productivity is compensated by a decline in the mark-up and
hence by a rise in the labor share of output at the expense of the non-wage share.
It is therefore important to recognize that between the early 1970s, when unemployment
was at a minimum, and the second half of the 1980s, when unemployment
reached its peak, the share of labor declined appreciably and with no
significant exception or, the increase in real wages was smaller than that of productivity.
Thus the increased unemployment cannot be attributed to the excessive