BPEA | 1974 No. 2

The Wage Process: An Analysis of the Early 1970s

1974, No. 2

SINCE 1968, wages have been increasing at a fairly steady rate averaging 6 percent annually. In 1969-70, the question was why wages continued to increase so rapidly during a recession. Two hypotheses were offered to explain this puzzle: first, that demographic changes in the labor force had caused the measured unemployment rate to overstate the ease of the labor market; and second, that an increase in inflationary expectations had adversely shifted the inflation-unemployment tradeoff. In 1973, many economists were puzzled about why wages were increasing as slowly as 6 percent, especially given the very rapid increases in consumer prices. In 1974:2, however, the six-year wage plateau was exceeded and the rate of wage increase jumped to 9.6 percent.