Working Paper: NBER ID: w13239
Authors: Robert E. Lipsey; Birgitta Swedenborg
Abstract: A substantial part of international differences in prices of individual products, both goods and services, can be explained by differences in per capita income, wage compression, or low wage dispersion among low-wage workers, and short-term exchange rate fluctuations. Higher per capita income is associated with higher prices and higher wage dispersion with lower prices. The effects of higher income and wage dispersion are moderated for the more tradable products. The effects of wage dispersion, on the other hand, are magnified for the more labor-intensive products, particularly low-skill services. The differences in prices across countries are reflected in differences in the composition of consumption. Countries in which prices of labor-intensive services are very high, such as the Nordic countries, consume much less of them. For some services, the shares of GDP consumed in high-price countries are less than 20 percent of the shares in low-price countries. Since these are services of very low tradability, the low consumption levels of these services imply low employment in them.
Keywords: Product Prices; International Trade; Wage Dispersion
JEL Codes: E31; F10; J3
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| higher per capita income (P17) | higher prices for labor-intensive products (F16) |
| higher per capita income (P17) | higher prices for less tradable products (F19) |
| tradability (F19) | higher prices influenced by higher per capita income (F61) |
| wage dispersion (J31) | lower prices for less tradable products (F19) |
| wage dispersion (J31) | lower prices for labor-intensive services (J39) |
| wage compression (J31) | higher prices for labor-intensive products (F16) |
| wage dispersion (J31) | higher prices for less tradable products (F19) |
| wage dispersion (J31) | muted effect on prices for more tradable products (F69) |