WHY U.S. WAGE AND EMPLOYMENT BEHAVIOUR DIFFERS FROM THAT IN BRITAIN AND JAPAN.

This paper is complementary to the recent cross-country studies of Jeffrey Sachs (1979), and William Branson and Julio Rotemberg (1980), which document the contrast between nominal wage inertia in the postwar United States and real wage inertia in Europe and Japan, and examine the theoretical and policy implications of this contrast. Here I begin with another procedure for documenting the difference in nominal wage behaviour among the United Kingdom, United States and Japan, and then concentrate on explaining its causes rather than its consequences. Real wage inertia plays no role in my analysis, reflecting my finding that the real wage rate in quarterly postwar data for the United Kingdom and Japan displays more variability than in the United States. The basic argument of this paper comes down to three main points: (1) Macroeconomic instability in the United States has been aggravated by the unusually sluggish behaviour of nominal wages during the postwar era. Whether measured as the standard deviation of wages relative to hours worked, or the ratio of the respective response coefficients of wages and hours worked to changes in nominal GNP, wages in Britain and Japan are five to ten times more responsive than in the United States. Thus, of any given fluctuation in aggregate nominal demand, a larger fraction takes the form of a change in real output and employment in the United States than in the United Kingdom or Japan. (2) The drastic decline of American wage responsiveness in the postwar period as compared to the years between 1892 and 1940, together with the 1948 invention of the three-year staggered wage contract in the American unionised industrial sector, seems to be more than coincidental. It is not only the long duration of US contracts, but also their staggered nature, that makes wage changes relatively unresponsive to expansions or contractions in nominal GNP growth. (3) Japanese labour market institutions look much more like those suggested a... [ABSTRACT FROM AUTHOR]