2. 1 1 Sidney Weintraub. “A Tax-Based Incomes Policy,” Journal of economic Issues, June 1971. Initial points: ñ Inflation is partly the consequence of the never ending struggle over the distribution of income between various groups--e.g., unionized workers, professionals, retirees, public sector employees, and so forth. ñ As these groups seek to raise their incomes, money income can get ahead of productivity growth--putting upward pressure on unit labor costs. ñ The key to understanding inflation is in understanding the relationship between average money income and average labor productivity.

3. Definitions P : Price level Q :Real output Y 1 :Gross business product (Gross money income) N :Number of persons employed y 2 :Average money income(y = Y/N) A :Average product of labor (A = Q/N) w :Average (money) wage k:Average markup over unit labor cost 1 Omits nonprofit activities of households, government agencies, and nonprofit institutions. 2 Includes wages, profits, salaries, rents, interest, business taxes, and depreciation.

4. The Model (1) Therefore, (2) Divide Y and Q by N to obtain: (3) Now rewrite (3) to obtain: (4) Equation (4) tells us that the price level is determined by the ratio of average money income to average productivity

5. (5) Equation (5) indicates that the price level must rise if the rate of increase of ave. money income exceeds the rate of increase of labor productivity. We now focus on the relationship between money wages and labor productivity. (6) That is, gross money income is equal to the mark-up over unit labor cost (ULC) times the average money wage times the number of persons employed. Unit labor cost is defined as: The Wage Cost mark-up equation is written as follows: P = kw/A (8) (7)

10. Productivity, Compensation, and Unit Labor Cost in the U.S., 1989-97

11. This is a type of cost-push inflation + Profit-Push Inflation: If ULC remains constant, equation (8) indicates that the price level can only rise if k increases. Most studies indicate that k is remarkably stable over time (though the time path of k differs across industries). + Wage and Salary-Push Inflation:Wage and Salary-Push inflation arises from an increase in ULC over time., 2 sub-types

12. . Incomes policies are designed to tie increases in nominal wage and salary compensation to increases in labor productivity through the use of tax incentives