APPENDIX: Data Sources and Methodology
Artus, Jacques R., “Measures of Potential Output in Manufacturing for Eight Industrial Countries, 1955–78,” Staff Papers, International Monetary Fund (Washington), Vol. 24 (March 1977), pp. 1–35.
Artus, Jacques R., and Anthony G. Turner, “Measures of Potential Output in Manufacturing for Ten Industrial Countries, 1955–1980” (unpublished, International Monetary Fund, May 12, 1978).
Baily, Martin Neil, “Productivity and the Services of Capital and Labor,” Brookings Papers on Economic Activity: 1 (1981), The Brookings Institution (Washington), pp. 1–65.
Basevi, Giorgio, and others, Macroeconomic Prospects and Policies for the European Community, Economic Papers, No. 12 (Brussels: Commission of the European Communities, Directorate-General for Economic and Financial Affairs, April 1983).
Berndt, Ernst R., and David O. Wood, “Engineering and Econometric Interpretations of Energy-Capital Complementarity,” American Economic Review (Nashville, Tennessee), Vol. 69 (June 1979), pp. 342–54.
Blades, Derek, Service Lives of Fixed Assets, Organization for Economic Cooperation and Development Working Papers, No. 4 (Paris: OECD, Economics and Statistics Department, March 1983).
Bosworth, Barry P., “Capital Formation and Economic Policy,” Brookings Papers on Economic Activity: 2 (1982), The Brookings Institution (Washington), pp. 273–326.
Bowden, Roger J., “On the Existence and Secular Stability of u-v Loci,” Economica (London), Vol. 47 (February 1980), pp. 35–50.
Branson, William H., and Julio J. Rotemberg, “International Adjustment with Wage Rigidity,” European Economic Review (Amsterdam), Vol. 13 (May 1980), pp. 309–32.
Bruno, Michael, “Raw Materials, Profits, and the Productivity Slowdown,” Quarterly Journal of Economics (Cambridge, Massachusetts), Vol. 99 (February 1984), pp. 1–29.
Bruno, Michael, and Jeffrey Sachs, “Input Price Shocks and the Slowdown in Economic Growth: The Case of U.K. Manufacturing,” Review of Economic Studies (Clevedon, England), Vol. 49 (No. 5, 1982), pp. 679–705.
Denison, Edward F., “Accounting for Slower Growth: An Update,” in International Comparisons of Productivity and Causes of the Slowdown, ed. by John W. Kendrick (Cambridge, Massachusetts: Ballinger, July 1984), pp. 1–58.
Drèze, Jacques H., and Franco Modigliani, “The Trade-Off Between Real Wages and Employment in an Open Economy (Belgium),” European Economic Review (Amsterdam), Vol. 15 (January 1981), pp. 1–40.
Griffin, James M., and Paul R. Gregory, “An Intercountry Trans-Log Model of Energy Substitution Responses,” American Economic Review (Nashville, Tennessee), Vol. 66 (August 1982), pp. 845–57.
Grubb, Dennis, Richard Jackman, and Richard Layard, “Wage Rigidity and Unemployment in OECD Countries,” European Economic Review (Amsterdam), Vol. 21 (May 1983), pp. 11–49.
Kmenta, J., “On Estimation of the CES Production Function,” International Economic Review (Osaka), Vol. 8 (June 1967), pp. 180–89.
Knight, Malcolm, “Stagnation in the Belgian Manufacturing Sector: An Analysis of the Problem and Some Possible Solutions” (unpublished, International Monetary Fund, May 13, 1983).
Kouri, Pentti J.K., Jorge Braga de Macedo, and Albert J. Viscio, “Profitability, Employment and Structural Adjustment in France,” in Aspects Internationaux de la Macroéconomie de la France, Annales de l’INSEE, No. 47/48 (Paris: Institut National de la Statistique et des Etudes Economiques, July/December 1982), pp. 85–115.
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)| false “ Kouri, Pentti J.K., Jorge Braga de Macedo, and Albert J. Viscio, Profitability, Employment and Structural Adjustment in France,” in Aspects Internationaux de la Macroéconomie de la France, Annales de l’INSEE, No. 47/48( Paris: Institut National de la Statistique et des Etudes Economiques, July/December 1982), pp. 85– 115.
Leontief, Wassily W., “A Note on the Interrelations of Subsets of Independent Variables of a Continuous Function with Continuous First Derivatives,” American Mathematical Society Bulletin (Providence, Rhode Island), Vol. 53 (No. 4, 1947), pp. 343–50.
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)| false “ Leontief, Wassily W., A Note on the Interrelations of Subsets of Independent Variables of a Continuous Function with Continuous First Derivatives,” American Mathematical Society Bulletin( Providence, Rhode Island), Vol. 53(No. 4, 1947), pp. 343– 50. 10.1090/S0002-9904-1947-08796-6
Lipschitz, Leslie, and Susan M. Schadler, “Relative Prices, Real Wages, and Macroeconomic Policies: Some Evidence from Manufacturing in Japan and the United Kingdom,” Staff Papers, International Monetary Fund (Washington), Vol. 31 (June 1984), pp. 303–38.
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)| false “ Lipschitz, Leslie, and Susan M. Schadler, Relative Prices, Real Wages, and Macroeconomic Policies: Some Evidence from Manufacturing in Japan and the United Kingdom,” Staff Papers, International Monetary Fund( Washington), Vol. 31( June 1984), pp. 303– 38. 10.2307/3866795
Perloff, Jeffrey M., and Michael L. Wachter, “The Productivity Slowdown: A Labor Problem?” in Federal Reserve Bank of Boston, The Decline in Productivity Growth, Conference Series, No. 22 (Boston: FRBB, 1980), pp. 115–42.
Perry, George L., “Labor Force Structure, Potential Output, and Productivity,” Brookings Papers on Economic Activity: 3 (1971), The Brookings Institution (Washington), pp. 533–65.
Pindyck, Robert S., “Interfuel Substitution and the Industrial Demand for Energy: An International Comparison,” Review of Economics and Statistics (Cambridge, Massachusetts), Vol. 61 (May 1979), pp. 169–79.
Sachs, Jeffrey D., “Wages, Profits, and Macroeconomic Adjustment: A Comparative Study,” Brookings Papers on Economic Activity: 2 (1979), The Brookings Institution (Washington), pp. 269–319.
Sachs, Jeffrey D., “Real Wages and Unemployment in the OECD Countries,” Brookings Papers on Economic Activity: 1 (1983), The Brookings Institution (Washington), pp. 255–304.
Solow, Robert M., “Technical Change and the Aggregate Production Function,” Review of Economics and Statistics (Cambridge, Massachusetts), Vol. 39 (August 1957), pp. 312–20.
Steinherr, Alfred, Income Distribution and Employment in the European Communities, 1960–1982, Economic Papers, No. 23 (Brussels: Commission of the European Communities, December 1983).
Mr. Artus, Assistant Director of the Research Department, is a graduate of the Faculty of Law and Economics in Paris and of the University of California at Berkeley.
The author acknowledges his debt to his colleagues in the Research Department and in area departments of the Fund for helpful comments and suggestions.
Malinvaud (1977, 1982) presents an updated theoretical analysis of the relation between inappropriate real wages and unemployment. Sachs (1979, 1983), Branson and Rotemberg (1980), Drèze and Modigliani (1981), Bruno and Sachs (1982), Giersch (1982), Kouri, Braga de Macedo, and Viscio (1982), Grubb, Jackman, and Layard (1983), Knight (1983), Steinherr (1983), and Lipschitz and Schadler (1984; this issue) are some of the principal advocates of the view that the level of the real wage rate is a major obstacle to a return to high employment in European countries. Sachs (1983) and others have found evidence of inappropriately high real wages in the United States and in Japan but have not detected marked effects on unemployment in these two countries.
There is also some evidence that in several countries the share of labor costs in value added has risen in other sectors during the past decade and a half, but this evidence is difficult to interpret. Sectors such as transport, communication, and utilities are largely under public control in most industrial countries, so that the profit motive does not play an important role in determining their demand for labor. In the private service sector, it is difficult to define the share of labor costs because of the high proportion of persons working on their own account.
Among the studies listed in footnote 1, Knight (1983) and Lipschitz and Schadler (1984) use a production function approach to allow for the effect of changes in the relative availability of labor and capital on the warranted share of labor costs in value added. They ignore, however, the possible effect of changes in production techniques and in the price of energy on this share. The other studies mentioned assume that any sustained gap between the growth of the real wage rate (defined from the employer’s standpoint) and the growth of labor productivity implies a disequilibrium situation. The drawbacks of such an assumption and the need for a comprehensive production function approach have rightly been stressed by Basevi and others (1983).
The assumption of constant returns to scale was tested as part of the empirical study by adding a scale parameter to equation (1). This parameter was not found to be significantly different from unity.
The demand for labor is derived under the assumption that the flow of capital services is given. To derive it, it is more convenient from a mathematical standpoint to use equation (1) rather than its linear approximation, represented by equation (2).
A possible solution would be to have a separate, distributed lag on w/p and Y, but here again there would be a problem of multicollinearity. The major change in w/p took place in the early 1970s, and it would be difficult to disentangle its effect on the demand for labor from the effect of the likely concomitant change in the rate of technical progress.
Consideration of the conditions in the steel and shipbuilding industries in European countries during the 1970s and early 1980s suggests that a disequilibrium situation, involving low or negative profitability and an excess of labor, can at times last more than a decade.
In European countries, the wage explosion of late 1969 is usually considered to mark the beginning of the real wage problem. In the United States and Canada, the beginning of the problem is usually traced to the 1973–74 oil price increase.
For the United States, the only data available are for man-hours paid. See the Appendix for data sources.
“Gross capital stock” refers to the equipment that has not been discarded. In this context, if some equipment has lost x percent of its initial efficiency, then x percent of the equipment is considered to have been discarded. By contrast, the net capital stock excludes not only discards, but also the depreciation of the equipment that has not been discarded. This depreciation reflects the fact that the equipment, while retaining its original efficiency, has a remaining life expectancy that is shorter than on the date of purchase. In the main, the net capital stock can be viewed as the discounted value of the expected stream of capital services to be derived from the existing capital stock. Thus, the net value of equipment will normally start declining well ahead of any decline in the flow of services that can be derived from that equipment. For this reason, no attempt is made to use the net capital stock in the present study.
The other equations involve variables such as
It has been argued that various other factors, especially the male-female ratio, should be taken into account in the calculation of the amount of labor input. This has led Perry (1971), Perloff and Wachter (1980) and others to calculate weighted indices of man-hours, with the weights based on the relative pay scales for the various components of the labor force. For the manufacturing sector, however, these indices have usually been found to deviate little from simple indices based on the unweighted man-hours. A good review of issues related to the measurement of labor services can be found in Baily (1981).
See the article “Capital Expenditures by Business for Pollution Abatement” in each June issue of the Survey of Current Business, U.S. Department of Commerce, Bureau of Economic Analysis (Washington). See also the November 1982 issue.
Before 1961, the data for the Federal Republic of Germany exclude Berlin and Saarland; therefore, they are not directly comparable with the data for subsequent years.
The estimation was carried out with the minimum-distance estimation routine of the Research Analysis Language (RAL) program. To enable estimation of the production and share functions as a system of two simultaneous equations, the variables in the share functions were set at zero during 1970–82 or 1974–82, depending on the group of countries. The estimation was then carried out for the period through 1982. The standard error of estimate of each equation was recalculated after reducing the number of degrees of freedom for the observations in the share functions corresponding to 1970–82 or 1974–82.
As explained in the Appendix, in the United States, Canada, France, and Italy the estimated value of λt for 1973–82 in model A may be biased downward to a small extent because the data on real value added for this period are calculated on the basis of the pre-1973 relative price of energy.
The estimates are as follows (an asterisk indicates significance at the 5 percent level; parentheses indicate standard errors):
These estimates are based on the ordinary least-squares method and have the usual statistical properties. The standard errors are often much larger than those presented in Table 3, but most of them are still relatively small.
This method assumes that SE and ln(K/E) were relatively stable during the pre-1972 period. For Canada, where K/E was declining at a marked rate during the 1960s and early 1970s, the 1972–82 change in ln(K/E) was calculated in terms of deviations from the 1962–72 tendency.
This estimate of ηEK can be compared with the E-K gross substitution elasticities of 0.133 for the U.S. manufacturing sector, 0.501 for Canadian manufacturing in Ontario, and 0.650 for Canadian manufacturing in British Columbia that were obtained by Berndt and Wood (1979) on the basis of pre-1972 data. The estimate implies that an increase in the price of energy may lead to a decline in the demand for capital services. For example, a 100 percent increase in the price of energy could lead to an increase in pK* of 15 percent (assuming that energy represents initially 15 percent of the total energy and capital cost), an increase in p* of 5 percent (assuming that energy represents initially 5 percent of the total labor, capital, and energy cost), and a decline in the demand for K* of 7 percent (assuming an elasticity of substitution of 0.7 between K* and L and a fixed amount of L). With an elasticity of substitution of 0.3 between K and E, the ratio of E to K would change by 30 percent. The final result would be a drop in the demand for E of 32 percent and a drop in the demand for K of 2 percent (averaging to the drop in K* of 7 percent, given the 15 percent weight on E and the 85 percent weight on K).
From equation (12), we see that if
This adjustment is more sizable than it appears because payroll taxes rose sharply during 1979–82 in France, Italy, the United Kingdom, and Japan, so that the growth of the take-home wage was even lower than the growth of the gross wage considered here (see Steinherr (1983)). In contrast, payroll taxes in the United States were reduced during this period, decreasing the need for a cut in the take-home wage.
We choose model A to facilitate the comparison with the results of Lipschitz and Schadler, which do not take account of the effects of energy prices on the shares of labor costs in value added.
The present study ends in 1982; however, the preliminary data available for 1983 suggest that, except in the United Kingdom, little progress was made toward adjustment during that year. The share of labor costs in value added in manufacturing may have declined by 1 to 2 percentage points in the United States, Canada, France, and the Federal Republic of Germany and may have risen by 1 to 2 percentage points in Japan and Italy. With cyclical developments taken into account, this represents probably a small decline in the wage gap in 1983—by, say, 2 percentage points—in France and Germany, a small rise in Japan, and not much change in the other countries. In contrast, the share of labor costs may have declined by about 4 percentage points in the United Kingdom—a decline that, once the modest economic recovery is taken into account, may represent a decline in the wage gap of 4 or 5 percentage points.
A comprehensive empirical analysis showing that increases in labor shares (or in product wages) have had a negative effect on employment growth in Europe can be found in Steinherr (1983).
Extensive studies of the lag from start of construction to completion have been made by Mayer (1960). The coefficients of equation (21) are based on Mayer’s results and on an assumed start-up period of two quarters.
These estimates are based on the 1942 edition of U.S. Treasury Department, Bulletin F (Washington: Government Printing Office), which remains the standard reference for calculations of capital stocks in the United States. A recent survey by Blades (1983) found that calculations of capital stocks made in other industrial countries are normally based on discard rates similar to the U.S. rates. The two important exceptions are Japan, with more rapid discard rates, and the United Kingdom, with slower discard rates. Given that most capital goods are similar throughout the industrial world, however, there was little reason in the context of the present study to assume that the “economic efficiency” of capital goods changed persistently at markedly different rates in the various countries.
The Winfrey S-3 distribution is described in National Technical Information Service, Fixed Nonresidential Business Capital in the United States, 1925–73 (Springfield, Virginia: NTIS, 1974).
The estimates of 0.02 and 0.05 were initially suggested by Solow (1957) in his pioneering article. Econometric results consistent with these estimates were obtained in Artus and Turner (1978).
The data published by the International Energy Agency refer to the industrial sector, but the definition of the industrial sector used by the Agency is comparable with the definition of the manufacturing sector used in national accounts statistics.