Wage Inflation and Unemployment in Britain and America 1892–1991

This paper examines the stability of the wage inflation process in Britain and America from 1892 to 1991. Utilizing a simple model of the aggregate labor market that treats wage inflation and the annual change in the unemployment rate as jointly endogenous variables, we find no evidence of substantial parameter shifts. In particular, there is no evidence of a secular increase in wage rigidity in either country nor is there support for the notion that periods of persistently high unemployment, such as the 1930s or the 1980s, are characterized by significant increases in wage rigidity. Our results are consistent with the findings of several other studies and indicate that wage rigidity has been a stable characteristic of labor markets since the end of the 19th century. Our results also suggest that the unemployment performance of these two countries over time can be explained by the interaction of demand shocks and wage rigidity.