GERMAN AND AMERICAN WAGE AND PRICE DYNAMICS - DIFFERENCES AND COMMON THEMES

The theoretical section of this paper develops a new nonstructural mod el of wage and price adjustment that integrates several concepts that have often been treated separately, including Phillips curve 'level ef fects', hysteresis 'change effects', the error-correction mechanism, a nd the role of changes in labor's share that act as a supply shock. Th e empirical analysis reaches two striking conclusions. First, during 1 973-1990 coefficients in our German wage equations are remarkably simi lar to those in the U.S., with almost identical estimates of the Phill ips curve slope, of the hysteresis effect, and of the NAIRU. The two c ountries also share similar inflation behavior, in that inflation depe nds more closely on the capacity utilization rate than on the unemploy ment rate. The big difference between the two countries is that there seems to be no feedback from wages to prices in Germany, and so high u nemployment does not put downward pressure on the inflation rate. Duri ng the 1970s and 1980s in Germany there emerged a growing mismatch bet ween the labor market and industrial capacity, so that the unemploymen t rate consistent with the mean (constant-inflation) utilization rate ('MURU') increased sharply, while in the U.S. the MURU was relatively stable.