Wages and Prices Are Not Always Sticky

Arthur M. Okun's last book, Prices and Quantities, contributes a theory of universal wage and price stickiness, but provides no explanation at all of historical and cross country differences in behavior. The core of this paper provides a new empirical characterization of price and wage changes over the last century in the U.S., U.K., and Japan, in order to demonstrate the wide variety of historical responses that have occurred. Equations for changes in the GNP deflator, in the hourly manufacturing wage rate, and in the real wage rate are estimated, with attention to the influence of both demand and supply disturbances. Because of the long sample period involved, extending back to 1875 for the U.K. and to 1892 for the other two countries, there is extensive attention to shifts in parameters. My description of U.S. data differs from Okun's framework by rejecting his wage-wage formulation of the postwar U.S. inflation inertia process, by allowing the impact of demand disturbances to depend on both the level and rate of change of aggregate demand, by allowing demand to influence price- setting as well as wage-setting behavior, and by stressing the fact that inertia in the U.S. adjustme