Working Paper: NBER ID: w1254
Authors: Richard C. Marston; Stephen J. Turnovsky
Abstract: This paper analyzes two simple wage rules that keep employment constant when there are shocks to the prices of imported materials. One rule ties nominal wages to the GNP deflator rather than the consumer price index. The second rule, followed by Japan after the second oil price shock, ties the real wage to real GNP. The paper shows the effects on output, real income, and other macroeconomic variables of choosing either rule in place of the real wage stability provided by conventional wage indexation.
Keywords: wage policy; macroeconomic stabilization; imported materials prices
JEL Codes: E24; F41
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| real wage rigidity (J31) | decrease in employment (J63) |
| real wage rigidity (J31) | decrease in real income (E25) |
| adjusting real wages to maintain employment (J38) | mitigate adverse effects of price shocks on gross output (E39) |
| downward adjustment of real wages (J31) | increase in employment (J68) |
| stabilizing real income (E25) | downward adjustment of real wages (J31) |
| wage policies (J38) | macroeconomic outcomes (E66) |