Demand and Price Analysis, Research Methods/Statistical Methods

In “Valuation Under Uncertainty, ” which recently appeared in this Journal (September 1967), Houng-Yhi Chen argues [1, pp. 313–314] that “Robichek and Myers' criticism [2, 3] of the use of the risk-adjusted discount rate is unfounded, ” and suggests that our “conclusions must be based in part on a misunderstanding of the risk-adjusted discount rate method.” These charges are without foundation, as we will show here.

n a pioneering paper in 1958 Phillips [6] advanced the proposition that in the United Kingdom there is a statistically significant relationship between the level and the rate of change of unemployment (U and A U) and the rate of change of money wage rates (AW) which has been remarkably stable during the hundred years since 1862.1 Phillips, Lipsey [5] and others have advanced theoretical grounds on which it has been concluded that unemployment is the causal variable in the observed relationship. There is reason to believe that this proposition is widely accepted today and there is evidence to suspect that it has reinforced arguments in favour of controlling the price level through the level of unemployment. The Phillips hypothesis has been the subject of considerable discussion. Kaldor [3] in 1959 accepted the empirical evidence which supports it but disputed the postulated chain of causation. His argument may be taken to mean that the observed relationship between AW and U is consistent with the hypothesis of no causal connection between the two variables since, within certain limits, both could be concomitants of variations in the level of activity. Dicks-Mireaux and Dow [1] in 1959, Hines [2] in 1964, and others have drawn attention to factors such as the rate of change of the price level (AP) and the rate of change of the percentage of the labour force unionised (AT) which may affect AW independently of U and AU. Knowles and Winsten [4] in 1959, doubted whether the results of Phillips had any implication for public policy. They observed that, on his own data, the critical range of unemployment, between 0 and 3 'A per cent of the labour force, is compatible with any range of inflation between 2 per cent and 28 per cent per annum, while a stable wage level is compatible with between 2 per cent and 22 per cent of the labour force being unemployed. In this paper, we propose to re-examine the hypothesis and the statistical evidence concerning the relationship between the level of unemployment and the rate of change of money wage rates. Specifically, it will be shown that although there was a strong relationship between unemployment and changes in money wage rates in the 19th century, in subsequent years, the association has been very much weaker. Moreover, in the post 19th century years, the level of unemployment does not make a significant contribution to the explanation of the variance in money wage rates in models which include such variables as changes in the cost of living and the level and the rate of change of unionisation. Further, when the coefficients of the unemployment variables are used to predict subsequent values of AW conditional on U and AU, rather poor predictions are obtained. It will be suggested that there are good reasons why these results should have been obtained. In the years since the 19th century, new institutions and relationships have come to dominate the wage bargain. Since unemployment is now a relatively unimportant determinant of wage rate changes, its role in the control of wage inflation must in consequence be severely reduced.

T HIS paper analyzes negotiated settlements over a 17-year period. The analysis uses annual data for manufacturing as a whole, for individual manufacturing industries, and for building construction as a special case. Various comparisons are made. The wagesettlement series for manufacturing is compared with increases in straight-time average earnings in manufacturing and the unemployment rate in manufacturing; settlements are also compared with earnings increases for individual manufacturing industries, suggesting some conclusions with respect to wage drift and the wage-price guidelines of the Kennedy and Johnson administrations. Likewise, settlements are compared for eleven manufacturing industries and construction, indicating the contrasts among them and the effects of changes in industry differentials upon the structure. Such comparison raises questions concerning the influences of the wage-price guidelines on negotiated increases in various types of industry beginning in 1962. Finally, negotiated increases in building construction are compared with such increases for manufacturing as a whole and with the relative unemployment rate for construction workers, indicating disparate developments and the consequent pressures on negotiations in manufacturing, especially the mass production industries.

E. S. Phelps, R. A. Pollak; On Second-Best National Saving and Game-Equilibrium Growth1, The Review of Economic Studies, Volume 35, Issue 2, 1 April 1968,

I. Introduction, 219. — II. The transcendental production function, 221. — III. An empirical test of the transcendental production function, 228. — IV. Conclusions, 237. — Appendix, 238.

Journal Article An Invariably Stable Cobweb Model Get access J. A. Carlson J. A. Carlson Purdue University Search for other works by this author on: Oxford Academic Google Scholar The Review of Economic Studies, Volume 35, Issue 3, July 1968, Pages 360–362, https://doi.org/10.2307/2296670 Published: 01 July 1968