TY  - JOUR
AU  - Blanchard,Olivier Jean
AU  - Katz,Lawrence
TI  - Wage Dynamics:  Reconciling Theory and Evidence
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 6924
PY  - 1999
Y2  - February 1999
UR  - http://www.nber.org/papers/w6924
L1  - http://www.nber.org/papers/w6924.pdf
N1  - Author contact info:
Olivier J. Blanchard
International Monetary Fund
Economic Counsellor and Director
Research Department
700 19th Street, NW
Rm. 10-700
Washington DC, 20431
Tel: 202-623-7825
Fax: 202-623-7271
E-Mail: blanchar@mit.edu

Lawrence F. Katz
Department of Economics
Harvard University
Cambridge, MA  02138
Tel: 617/495-5148
Fax: 617/613-1245
E-Mail: lkatz@harvard.edu
AB  - U.S. macroeconomic evidence shows a negative relation between the rate of change of wages and unemployment.  In contrast, most theories of wage determination imply a negative relation between the level of wages and unemployment.  In this paper, we ask whether one can reconcile the empirical evidence with theoretical wage relations.  We reach three main conclusions. First, we derive the condition under which the two can indeed be reconciled.  We show the constraints that such a condition imposes on the determinants of workers' reservation wages as well as the relative importance of workers' outside options as opposed to match specific productivity in wage determination. Second, in the light of this condition, we reinterpret the presence of an "error correction" term in macroeconomic wage relations for most European economies but not in the United States. Third, we show that whether this condition holds or not has important implications for the effects of a number of variables -- from real interest rates to oil prices to payroll taxes -- on the natural rate of unemployment.
ER  -