MICROECONOMIC CHANGES AND MACROECONOMIC 
                                                                    WAGE DlSlNFLATlON IN THE 1980s 
                         James H. Chan-Lee, David T. Coe and Menahem Prywes 
                                                                                                                              CONTENTS 
                 Introduction  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  122 
                   1.          Microeconomic policies and institutional changes affecting the labour 
                               market                          . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  125 
                                A.              Changes in government microeconomic policies related to social 
                                                protection  . . . . . . . . . . . . . . . . . . . . . . . . . . .  125 
                                 B.             Changes in other government microeconomic policies  . . . . .  132 
                                C.              Changes in indexation procedures and wage setting practices  .  134 
                  II.           How have  these  microeconomic and  institutional changes  affected 
                               wage developments at the macroeconomic level?                                                                                                                               . . . . . . . . .  135 
                                A.              Microeconomic changes and aggregate wage equations  . . . .  135 
                                 8.            The stability of  aggregate wage equations in the 1980s                                                                                                                                           . . .  140 
                 Policy implications                                                     . . . . . . . . . . . . . . . . . . . . . . . . . . .  145 
                 Appendix                                . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  150 
                 Bibliography  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  156 
                 The authors are members of the General Economics Division of the Economics and Statistics Department. 
                 They wish to thank Jeffrey Shafer, Axe1 Mittelstedt and their colleagues in the Country Studies Branch of the 
                 Economics and Statistics Department. 
                                                                                                                                              121 
                                                                       INTRODUCTION 
                      The past six years have seen the most sustained period of wage and price 
                                                                                 /- 
              disinflation since the Korean War. Unlike developments after the first oil price shock, 
              when wage growth contributed to high inflation, nominal wage moderation has been 
              an important factor behind the disinflation of the 1980s (Chart A): average nominal 
              pay increases in the seven largest OECD  economies accelerated to 10% per cent 
              immediately after the second oil price shock  but dropped to below 4per cent 
              by 1986. 
                      A number of factors contributed to rapid wage disinflation. The overall stance 
              of macroeconomic, particularly monetary, policies did not accommodate the second 
              large oil  price  increase.  Unemployment  rates rose sharply  and  oil and  non;oil 
              commodity prices fell.  In addition,  there was  renewed emphasis on enhancing 
              supply-side flexibility and structural adjustment through microeconomic policies. 
              These  policies were  advocated  partly for  the support they  could  offer to the 
              anti-inflationary stance of macroeconomic policy. 
                      These developments suggest a number of questions about microeconomic 
              policy changes and aggregate wage behaviour: i) What have been the important 
              changes since 1 980 in government microeconomic and regulatory policies affecting 
              the labour market, or in wage setting practices; and ii) How have these changes 
              affected aggregate wage developments or the response of wages to economic 
              events? These are the questions addressed in this paper. 
                      The paper is organised as follows: Section I presents a cross-country survey of 
              changes in labour market regulatory policies and wage bargaining arrangements. 
              The  number of new developments in these areas has been impressive and has 
              generally been consistent with the goal of enhancing the flexibility of labour markets; 
              but for any single country most of the changes have been relatively modest and 
              comparatively recent. In 
                                                       a number of important areas, however, such as increases in 
              social-security costs and the generosity of unemployment insurance systems and 
              minimum wages, trends established in the 1960s and 1970s appear to have been 
              decisively halted, or even reversed. Section II discusses how these microeconomic 
              or institutional changes might affect aggregate wage developments and assesses 
              the quantitative significance of these changes in the context of empirically-estimated 
              wage  equations  for  thirteen  QECD  economies.  There  is  some  evidence  that 
                                                                                 122 
                                                                                          CHART A 
                                   WAGE GROWTH, INFLATION AND UNEMPLOYMENT 
                                                          - Wage growth, private sector 
                                                          -----------.. Growth of the private consumption deflator 
                                                                        Unemployment rate 
                 Per cent                 United States                         Per cent           Per cent                        Japan                           Per cent 
                  12                                                                    12          30 -                                                              - 30 
                  10 
                   8 
                   6                                                                     6          15  -             :.                                              - 15 
                   4                                                                     4          10  -            ,         -..                                   - 10 
                                                                                                          --._ ... : * 
                   2                                                                     2           5-                                                              -5 
                                                                                                                                                        I 
                                                                                                                                                             -_ -- ~ 
                   0  70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85                    0                                                                                 0 
                                                                                                        'lOrJ;721sj7d7~7617~7817~8d81'82r8~8685 
                 Per cent                    Germany                            Per cent           Per cent                       France                          Per cent 
                                                                                        12                                                                                18 
                                                                                        10                                                                                16 
                                                                                                                                                                          14 
                                                                                         8                                                                                12 
                                                                                         6                                                                                10 
                                                                                                                                                                           8 
                                                                                         4                                                                                 6 
                                                                                         2                                                                                 4 
                                                                                                                                                                           2 
                      70 71 72 73 14 75 76 77 78 79 80 81 82 83 84 85                    0              70 71 72 73 74 75 76 77 78 79 80 8t 82 83 84 85 
                Pei cent              United Kingdom                            Per cent           Per cent                         Italy                         Per cent 
                 30                                                                    30           30 r 
                 25                                                                    25 
                 20                                                                    20 
                 15                                                                     15 
                 10                                                                    10 
                  5                                                                      5 
                  0  70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85                     0 
                                                                                          123 
                                                                               CHART A  (continued) 
                                     WAGE GROWTH, INFLATION AND UNEMPLOYMENT 
                     Per cent                   Canada                        Per cent         Per cent                  Australia                      Per cent 
                      l6  r                                                      1 16           30 r                                                       1 30 
                     Per cent                    Austria                      Per cent         Per cent                    Finland                      Per cent 
                      16 -                                                       - 16           25 r                                                       1 25 
                                                                                 - 14 
                                                                                 - 12                                                                          20 
                                                                                 - 10                                                                          15 
                                                                                                                                                               10 
                       4-                                                                                                                                       5 
                                                                                                                                                                0 
                           70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 
                     Per cent                Netherlands                      Per cent         Per cent                     Spain                       Per cent 
                                                                                     16         30                                                             30 
                                                                                     14         25                                                             25 
                                                                                     12         20                                                             20 
                                                                                     10 
                                                                                      8         15                                                             15 
                                                                                      6         10                                                             10 
                                                                                      4          5                                                              5 
                                                                                       2 
                           70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85             0            70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85             0 
                      Per cent                                                Per cent         Per cent                =witzedand                       Per cent 
                          -                     Sweden                           -                  -                                                      - 14 
                      14                                                             14         14 
                                                                                                                                                               10 
                                                                                                                                                           -8 
                                                                                                                                                           -6 
                       4-                                                                        4 A' 
                                                                                                 2-                                                        -2 
                           70 71 12 73 74 75 76 77 78 74 80 81 82 83 84 85                                                                                      0 
                                                                                        124