As stated, this thread uses trends in unit labor costs as a proxy for trends in inflation. Can we quantify this relationship further? Consider: We can define GDP in terms of labor costs as a markup process, i.e. GDP = kW, where ‘W’ is the total wage costs and ‘k’ is some as yet unknown transfer function.
If we divide both sides by the quantity of output (GDP/P), where P equals the price level, and we obtain: GDP/(GDP/P) = kW/(GDP/P). Now, convert W to an average wage (w) by dividing by the number employed, N, so that w = W/N, or alternately W = wN, to obtain: P = kwN/(GDP/P), If we now introduce output per employee: a = (GDP/P)/N, and substitute, we obtain:
P = k*(w/a), where w/a is the unit labor cost. We will call this equation the Wage Markup equation.
Thus, if k were a constant, changes in the price level would be fully reflected by changes in unit labor costs and vice versa, changes in unit labor costs would be fully reflected the price level. |
