The Role of Wages in the Inflation Process.

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.