The Changing Cyclical Behavior of Wages and Prices: 1890-1976

Jeffrey D. Sachs

NBER Working Paper No. 304
Issued in December 1978
NBER Program(s):Economic Fluctuations and Growth

The persistence of inflation during periods of high unemployment poses the central problem for macroeconomic policy in coming years. The extent of success in reducing both inflation and unemployment will depend strongly on the short-run responsiveness of wage inflation to unemployment and excess capacity. This paper studies changes in the cyclical responsiveness of inflation from 1890-1976, and concludes that a given shortfall in production relative to potential now "buys" a smaller reduction in the rate of inflation than in the past. From 1890-1929, a one percent decline in industrial production reduced inflation about .45%; for 1950-1976, the same output decline is estimated to slow inflation only about .l%. The analysis makes use of two methods to study the changing cyclical behavior of inflation. Following an innovative study by Cagan, calculations are made for wage and price inflation before and after eighteen business cycle peaks. While inflation slows in almost every recession, the declines in inflation in recent years are less pronounced than earlier, even when controlling for business cycle severity. In a second section of the study, econometric evidence is provided that also strongly supports the hypothesis of increasing rigidity of wage and price Inflation over the business cycle. In the last section of the paper, some possible reasons are cited for the declining responsiveness of inflation to unemployment. Ironically, successful macroeconomic policy might be in part responsible. To the extent that activist macroeconomic policy breaks the link between current unemployment and expectations of future unemployment, it is argued, unemployment today will not induce wage cuts in contracts for future periods. Also, the tremendous increase in duration and coverage of collective bargaining agreements is suggested as an important force behind the shifting behavior of wages and prices during the period of study.

download in pdf format
   (378 K)

email paper

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w0304

Published: Sachs, Jeffrey. "The Changing Cyclical Behavior of Wages and Prices: 1890-1 976." American Economic Review (March 1980).

Users who downloaded this paper also downloaded* these:
McArthur and Sachs w8114 Institutions and Geography: Comment on Acemoglu, Johnson and Robinson (2000)
Barro and McCleary w9682 Religion and Economic Growth
Romer w2639 The Great Crash and the Onset of the Great Depression
Gordon w0418 Monetary Policy and the 1979 Supply Shock
Bernanke w1054 Non-Monetary Effects of the Financial Crisis in the Propagation of the Great Depression
NBER Videos

National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email:

Contact Us