Weintraub's Wage-Cost-Markup (WCM) Model of Inflation

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Weintraub's Wage-Cost-Markup (WCM) Model of
Inflation

• Initial points
• 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.
• As these groups seek to raise their incomes,
  money income can get ahead of productivity
  growth--putting upward pressure on unit labor
  costs.
• The key to understanding inflation is in
  understanding the relationship between average
  money income and average labor productivity.

1Sidney Weintraub. A Tax-Based Incomes Policy,
Journal of economic Issues, June 1971.
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Definitions P Price level Q Real
output Y1 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
1Omits nonprofit activities of households,
government agencies, and nonprofit
institutions. 2Includes wages, profits, salaries,
rents, interest, business taxes, and depreciation.
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The Model
(1)
Equation (4) tells usthat the price level is
determined by the ratioof average moneyincome
to averageproductivity
Therefore,
(2)
Divide Y and Q by N to obtain
(3)
Now rewrite (3) to obtain
(4)
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(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
(7)
The Wage Cost mark-up equation is written as
follows
(8)
P kw/A
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Productivity, Compensation, and Unit Labor Cost
in the U.S., 1989-97
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This is a type of cost-push inflation
Incomes inflation

• 2 sub-types

• 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 InflationWage and
  Salary-Push inflation arises from an increase in
  ULC over time.

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