Wage Determination, Inflation, and the Industrial Structure: Reply
William Bomberger in his comment on our recent article raises three points. All are related to our long-run tradeoff between unemployment and inflation. His first point is that our C-shaped Phillips curve is not dependent on noncompetitive forces, as we claim to be the case, but is related to our rather curious use of the planning horizon. His second point is that our longrun model faces serious stability problems. His third point is that our analysis does not yield results which are congruent with the economy's experiences. Bomberger's first point is incorrect. He seems to believe that the size of the markup variable VI captures all of the noncompetitive elements in our model. This is not the case. Although the 4, variable is unique to the noncompetitive sector, measuring the safety factor or the risk aversion of the noncompetitive firm, it is not the only factor which distinguishes the noncompetitive sector. Rather, the main impact of the noncompetitive sector is in introducing the timing or planning period problem. Whereas competitive firms may be viewed as setting wages and prices continuously, the noncompetitive firm acts discontinuously. This creates a planning period over which the noncompetitive firm maintains a fixed wage and price strategy. We also make the important assumption that the firm is more concerned about a customer queue than a labor queue. The result is that it will set a wage premium so as to have a labor queue in the bulk of the planning period. At the extreme where it views a customer queue as prQhibitive, this will mean setting a wage premium sufficient to insure a labor queue throughout the period. The identical result can be obtained by assuming that the elasticity of the supply of labor to the noncomDetitive firm is larger than the elasticity of the derived demand for labor. Both assumptions-that the firm is more concerned with a customer than with a labor queue and that the supply elasticity is greater than the demand elasticity-seem to us to be theoretically viable and well established in the empirical literature. Since Bomberger views 4, as representing the noncompetitive elements in the model, he does not appreciate the role played by the fixed planning period. This leads him to suggest that a more straightforward way of dealing with the planning period is for the firm to consider its average market position. This, however, would eliminate one of the basic assumptions of our analysis. Since the noncompetitive firm is more concerned with a customer than a worker queue, it looks toward the end of the planning period in setting wages and prices. Bomberger observes that when firms look to the middle of the period, setting a wage premium sufficient to have a labor queue in the first half of the period and a customer queue in the second, the numerical elasticity of the long-run Phillips curve is quite low. As he verifies in equation (5) by using a period average (ignoring discounting), the wage markup is, in fact, exactly independent of the inflation rate. This is just what one would expect. We analyzed the midpoint case precisely because it gives a lower bound to the slope of the long-run tradeoff. Our point was and still remains, however, that noncompetitive firms aim beyond the midpoint. As for the numerical elasticity, in the extreme where only a labor queue is tolerable, the noncompetitive firm sets E=er and the aggregate wage premium of our equation (15) is proportional to
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