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The author argues that, with proper adjustments, the conventional view about the rise in inequality has been exaggerated. Indeed, in recent periods, most of the inequality can be attributed to gains by a small proportion of very high-income individuals. He proposes a variety of aggressive policies to counteract the levels of inequality found by his analysis. [ABSTRACT FROM AUTHOR]

The article discusses the issues related to the increase in income inequality in the U.S. It was suggested that the primary contributor of increased inequality is skill-biased technological change. According to a survey, the share of employees belonging to unions declined rapidly from 27% in 1979 to 19% in 1986, and then more slowly to 14% in 2005. David Card, Thomas Lemieux and Craig Ridell explained that the decline in unionization presents a 14% of growth in the variance of male wages between 1973 and 2001. The survey also indicate that half of the total increase in equality since 1966 reflects the 90th percentile gaining relative to the 10th percentile, and that the other half has occurred within the top 10th percentile.

This article comments on a research which discussed an economic model which would assess wage-setting process that underlies macro inflation. Today most disputes about inflation, focus on the speed of adjustment of inflation to shifts in nominal aggregate demand. Three main views of the inflation process compete for attention, differing mainly on this adjustment speed. First is the mainline view by George Perry which in its usual version makes wage change a function of lagged consumer price inflation, lagged wages, and a single demand variable, the inverse of an unemployment rate weighted to remove the impact of demographic shifts. At the other extreme is the second major approach to inflation, the Lucas-Sargent proposition of policy ineffectiveness. Although usually stated as a theory of output determination, it implies that the contemporaneous elasticity of price change to a fully anticipated change in aggregate demand is exactly unity. finally, teh credibility hypothesis of William Fellner also assumes a high elasticity of price change to a credible shift in demand growth engineered by policymakers, but he is vague about the length of time needed for the public to conclude that a given policy shift is permanent rather than temporary.

This section critiques a paper by Jeffrey Sachs published in this same issue of Brookings Papers on Economic Activity, which emphasizes the role of wages and especially of real wages in the macroeconomic performance and policy of seven major industrial economies. The second part of this section presents Sachs' response to these criticisms. The first commenter notes that he agrees with most of Sachs' analysis. He however makes some points about the details of Sachs' theory and interpretation of results. The second commenter points out that Sachs' paper is dazzling in the variety of talents that are brought to bear on a difficult and controversial topic of enormous scope. According to him, the main problems with the paper are that the empirical data do not provide strong supporting evidence for several of the basic hypotheses, and that puzzles emerge in intercountry differences in behavior that are neither explained by the author's framework nor ad-dressed in his discussion of results. Nevertheless, the second commenter says that despite the fact that he does not find the last part of Sachs' paper as convincing as he does, he heartily endorses Sachs' emphasis on institutional differences.

This article comments on an article about a comprehensive analysis of the implications of an employer tax-based income policy. Several issues raised in the paper apply not only to tax-based income policies, but equally to any supply shift, whether a positive shift caused by a crop failure, a payroll-tax increase that raises the price at which firms are willing to supply a given output, a negative shift caused by bumper crops, or a successful tax-based income policy that reduces that price. For a given growth rate of nominal income, a supply shift changes the division of that spending between growth in real output and price increases. Bumper crops or a successful tax-based income policy would make possible, for any given growth rate of nominal income, a simultaneous reduction in the rate of inflation and increase in growth of real output. This, in turn, would allow the Federal Reserve to decelerate the rate of monetary growth without causing a recession or higher unemployment. In general, any government-induced price-reducing supply shift, whether in the form of price controls, tax incentive programs or a reduction in payroll or excise taxes, creates an environment in which monetary deceleration is encouraged and therefore, the administration and Congress indirectly gain control over monetary policy.

This article examines the proposition by Robert J. Gordon that wage inflation rises or falls of its own accord, independent of money or other determinants of demand. The wage-push hypothesis is supported by any evidence that wages behave in a way that is not predictable from the behavior of money and other determinants of demand. The extreme wage-push hypothesis requires, moreover, that demand have no role in predicting wages. The believer in wage push is hoping for a wage equation with large unexplained residuals and low coefficients for money and the real output gap. Obviously, Gordon's research cannot fail to turn up some evidence in favor of wage push. Everyone grants the wage equation some residuals. Just the opposite evidence would support the monetarist hypothesis. Wages should be highly predictable and money should have an important role in the prediction. The monetarist hopes that the wage equation will fit well and that demand will matter. It is noteworthy that, from the perspective of this paper, much of Gordon's past research has been devoted to establishing a monetarist proposition--namely, the success of the Phillips curve. Still, there is an evident bias in the procedure of this paper in favor of the wage-push hypothesis--every user of econometrics knows how easy it is to run unsuccessful regressions.

This section presents several comments about a paper by Robert E. Hall published in this same issue of Brookings Papers on Economic Activity, which analyzes how labor market conditions determine the evolution of the wage level and hence the rate of wage inflation. Hall's paper makes a major contribution with its theoretical analysis of the role of turnover and quality adjustments in the process of wage setting. But it is seriously deficient when viewed as an attempt at comprehensive analysis of the inflation process. The major problem is the failure to assign any role to prices in the setting of wages; indeed, scarcely anywhere in this entire paper on the inflation process does the word prices appear. Although Hall's paper makes an important contribution to the theory of labor markets, it is not as general as one might wish. Hall adds variations in labor quality to wage changes as a second instrument of employer policy. Hall shows how the marginal and average effective wages can diverge. This is a novel and interesting idea: new workers may be paid more than old ones in the sense that they provide labor services of lower quality for the same wage, and yet old workers may not quit if their wage rate contains a premium for the specific human capital that their employer has invested in them.

Presents a paper on the response of wages and prices to the first two years on controls initiated by President Richard Nixon. Intent to study the changes in prices and wages behavior. Methodological preliminaries and econometric models; Alternative counterfactual simulations for 1971-73; Untangling the effects of import prices; Conclusion that the inflation of 1973 needs reconsideration; Discussion of the paper by the panel.

The article focuses on the role of wages in the inflation process. Traditionally wage equations of the Phillips curve variety are the central element explaining inflation in large-scale Keynesian econometric models. Price changes are specified as determined by a "markup" price equation and have little life of their own, mainly mimicking wage changes. Such a view of the inflation process is rejected by this paper. A relatively unrestricted equation for price change can be converted into a form in which wage changes enter only in the form of lagged changes in labor's share. When the labor's share variable is statistically insignificant, wage behavior becomes irrelevant for inflation. Differences in the behavior of labor cost and inflation imply changes in labor's income share which alter the profit share of income in the opposite direction. The paper also concludes that price changes are irrelevant for wage changes, that is, that both prices and labor costs live a life of their own. No evidence is provided on the causes of such a new regime in wage behavior in which labor's share has fallen, nor indeed on the causes of the old regime in which labor's share rose from 1965 to 1978.

The high variance and continued acceleration of inflation during the 1970's pose new challenges to the time-series econometrician. The theme of this article is that inflation in the decade of nineteen seventies has depended not only on the level of aggregate demand and the role of inertia but also on a number of different supply shocks. Two of these, the increase in the relative price of oil and decline in the rate of productivity growth, have been outside of the direct control of the government, particularly in the short run. But both the variance and acceleration of inflation have been aggravated by three measures within the purview of government policy-makers: increases in the effective Social Security tax, increases in the minimum wage rate, and episodes of direct government intervention in the price-setting process. Because of their futility, these intervention episodes can be regarded as "self-inflicted wounds," like the tax and minimum wage changes that normally are described by this term.