This article analyzes the issue of price cyclicality from a Post Keynesian perspective. It shows that there are two key factors at the center of the mechanism for the sudden U.S. transition from counter-cyclical to a-cyclical price movement in the early 1980s. First, the cost pass-through policy has been changed to ensure that the cyclical changes of input prices and/or labor productivity are absorbed more thoroughly and are thus reflected more frequently in profit markups than occurred prior to 1984. This relatively increased adaptability of the profit markups in the aggregate sense between the pricing periods cushions the direct effect of cyclical changes in the cost base on price cyclicality. Second, a structural change in the U.S. labor productivity's cyclical property has generated cost-base stability during the post-1984 period. Declines in hiring and firing costs and cutbacks in social security benefits have led the labor discipline effect to dominate the labor hoarding effect. This has allowed labor productivity to increase as the unemployment rate rises; thus, the cost base cyclicality has weakened, and prices have become less cyclical since 1984."> This article analyzes the issue of price cyclicality from a Post Keynesian perspective. It shows that there are two key factors at the center of the mechanism for the sudden U.S. transition from counter-cyclical to a-cyclical price movement in the early 1980s. First, the cost pass-through policy has been changed to ensure that the cyclical changes of input prices and/or labor productivity are absorbed more thoroughly and are thus reflected more frequently in profit markups than occurred prior to 1984. This relatively increased adaptability of the profit markups in the aggregate sense between the pricing periods cushions the direct effect of cyclical changes in the cost base on price cyclicality. Second, a structural change in the U.S. labor productivity's cyclical property has generated cost-base stability during the post-1984 period. Declines in hiring and firing costs and cutbacks in social security benefits have led the labor discipline effect to dominate the labor hoarding effect. This has allowed labor productivity to increase as the unemployment rate rises; thus, the cost base cyclicality has weakened, and prices have become less cyclical since 1984."> This article analyzes the issue of price cyclicality from a Post Keynesian perspective. It shows that there are two key factors at the center of the mechanism for the sudden U.">
[go: up one dir, main page]
IDEAS home Printed from https://ideas.repec.org/a/bla/metroe/v66y2015i4p661-685.html
   My bibliography  Save this article

Why Have U.S. Prices Become Independent of Business Cycles?

Author

Listed:
  • Gyun Cheol Gu
Abstract
type="main"> This article analyzes the issue of price cyclicality from a Post Keynesian perspective. It shows that there are two key factors at the center of the mechanism for the sudden U.S. transition from counter-cyclical to a-cyclical price movement in the early 1980s. First, the cost pass-through policy has been changed to ensure that the cyclical changes of input prices and/or labor productivity are absorbed more thoroughly and are thus reflected more frequently in profit markups than occurred prior to 1984. This relatively increased adaptability of the profit markups in the aggregate sense between the pricing periods cushions the direct effect of cyclical changes in the cost base on price cyclicality. Second, a structural change in the U.S. labor productivity's cyclical property has generated cost-base stability during the post-1984 period. Declines in hiring and firing costs and cutbacks in social security benefits have led the labor discipline effect to dominate the labor hoarding effect. This has allowed labor productivity to increase as the unemployment rate rises; thus, the cost base cyclicality has weakened, and prices have become less cyclical since 1984.

Suggested Citation

  • Gyun Cheol Gu, 2015. "Why Have U.S. Prices Become Independent of Business Cycles?," Metroeconomica, Wiley Blackwell, vol. 66(4), pages 661-685, November.
    • Handle: RePEc:bla:metroe:v:66:y:2015:i:4:p:661-685
    as

    Download full text from publisher

    File URL: http://hdl.handle.net/10.1111/meca.12086
    Download Restriction: Access to full text is restricted to subscribers.
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Jordi Galí & Thijs van Rens, 2021. "The Vanishing Procyclicality of Labour Productivity [Why have business cycle fluctuations become less volatile?]," The Economic Journal, Royal Economic Society, vol. 131(633), pages 302-326.
    2. William T. Dickens & Lorenz Goette & Erica L. Groshen & Steinar Holden & Julian Messina & Mark E. Schweitzer & Jarkko Turunen & Melanie E. Ward, 2007. "How Wages Change: Micro Evidence from the International Wage Flexibility Project," Journal of Economic Perspectives, American Economic Association, vol. 21(2), pages 195-214, Spring.
    3. Jan Babecký & Philip Du Caju & Theodora Kosma & Martina Lawless & Julián Messina & Tairi Rõõm, 2010. "Downward Nominal and Real Wage Rigidity: Survey Evidence from European Firms," Scandinavian Journal of Economics, Wiley Blackwell, vol. 112(4), pages 884-910, December.
    4. Holden Steinar & Wulfsberg Fredrik, 2008. "Downward Nominal Wage Rigidity in the OECD," The B.E. Journal of Macroeconomics, De Gruyter, vol. 8(1), pages 1-50, April.
    5. Piero Ferri, 2007. "The Labour Market And Technical Change In Endogenous Cycles," Metroeconomica, Wiley Blackwell, vol. 58(4), pages 609-633, November.
    6. Carl R. Gwin, 2009. "Asymmetric Price Adjustment: Cross-Industry Evidence," Southern Economic Journal, John Wiley & Sons, vol. 76(1), pages 249-265, July.
    7. Bertola, Giuseppe & Dabusinskas, Aurelijus & Hoeberichts, Marco & Izquierdo, Mario & Kwapil, Claudia & Montornès, Jeremi & Radowski, Daniel, 2012. "Price, wage and employment response to shocks: evidence from the WDN survey," Labour Economics, Elsevier, vol. 19(5), pages 783-791.
    8. Theo Offerman & Jan Potters, 2006. "Does Auctioning of Entry Licences Induce Collusion? An Experimental Study," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 73(3), pages 769-791.
    9. Armen A. Alchian, 1950. "Uncertainty, Evolution, and Economic Theory," Journal of Political Economy, University of Chicago Press, vol. 58(3), pages 211-211.
    10. Lance Taylor, 2012. "Growth, Cycles, Asset Prices And Finance," Metroeconomica, Wiley Blackwell, vol. 63(1), pages 40-63, February.
    11. Sam Peltzman, 2000. "Prices Rise Faster than They Fall," Journal of Political Economy, University of Chicago Press, vol. 108(3), pages 466-502, June.
    12. Kahn, Shulamit, 1997. "Evidence of Nominal Wage Stickiness from Microdata," American Economic Review, American Economic Association, vol. 87(5), pages 993-1008, December.
    13. Margaret M. McConnell & Gabriel Perez-Quiros, 2000. "Output fluctuations in the United States: what has changed since the early 1980s?," Proceedings, Federal Reserve Bank of San Francisco, issue Mar.
    14. Elizabeth J. Warner & Robert B. Barsky, 1995. "The Timing and Magnitude of Retail Store Markdowns: Evidence from Weekends and Holidays," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 110(2), pages 321-352.
    15. Bowles, Samuel, 1985. "The Production Process in a Competitive Economy: Walrasian, Neo-Hobbesian, and Marxian Models," American Economic Review, American Economic Association, vol. 75(1), pages 16-36, March.
    16. Roy H. Webb, 2003. "The cyclical behavior of prices and employee compensation," Economic Quarterly, Federal Reserve Bank of Richmond, vol. 89(Win), pages 69-83.
    17. R. L. Hall & C. J. Hitch, 1939. "Price Theory And Business Behaviour," Oxford Economic Papers, Oxford University Press, vol. 0(1), pages 12-45.
    18. Haroon Mumtaz & Saverio Simonelli & Paolo Surico, 2011. "International Comovements, Business Cycle and Inflation: a Historical Perspective," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 14(1), pages 176-198, January.
    19. Daniel Friedman & Kai Pommerenke & Rajan Lukose & Garrett Milam & Bernardo Huberman, 2007. "Searching for the sunk cost fallacy," Experimental Economics, Springer;Economic Science Association, vol. 10(1), pages 79-104, March.
    20. James M. MacDonald, 2000. "Demand, Information, and Competition: Why Do Food Prices Fall at Seasonal Demand Peaks?," Journal of Industrial Economics, Wiley Blackwell, vol. 48(1), pages 27-45, March.
    21. Steve Buchheit, 2004. "Fixed Cost Magnitude, Fixed Cost Reporting Format, and Competitive Pricing Decisions: Some Experimental Evidence," Contemporary Accounting Research, John Wiley & Sons, vol. 21(1), pages 1-24, March.
    22. Robert J. Barro & Silvana Tenreyro, 2006. "Closed and Open Economy Models of Business Cycles with Marked Up and Sticky Prices," Economic Journal, Royal Economic Society, vol. 116(511), pages 434-456, April.
    23. Alessandro Barattieri & Susanto Basu & Peter Gottschalk, 2014. "Some Evidence on the Importance of Sticky Wages," American Economic Journal: Macroeconomics, American Economic Association, vol. 6(1), pages 70-101, January.
    24. Chadha, Bankim & Prasad, Eswar, 1994. "Are prices countercyclical? Evidence from the G-7," Journal of Monetary Economics, Elsevier, vol. 34(2), pages 239-257, October.
    25. Plehn-Dujowich, Jose M., 2008. "On the counter-cyclicality of prices and markups in a Cournot model of entry," Economics Letters, Elsevier, vol. 99(2), pages 310-313, May.
    26. Nabil Al‐Najjar & Sandeep Baliga & David Besanko, 2008. "Market forces meet behavioral biases: cost misallocation and irrational pricing," RAND Journal of Economics, RAND Corporation, vol. 39(1), pages 214-237, March.
    27. Olivier Blanchard, 2009. "The State of Macro," Annual Review of Economics, Annual Reviews, vol. 1(1), pages 209-228, May.
    28. Matteo Degasperi & Thomas Fredholm, 2010. "Productivity Accounting Based On Production Prices," Metroeconomica, Wiley Blackwell, vol. 61(2), pages 267-281, May.
    29. Christopher J. Nekarda & Valerie A. Ramey, 2020. "The Cyclical Behavior of the Price‐Cost Markup," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 52(S2), pages 319-353, December.
    30. Judith A. Chevalier & Anil K. Kashyap & Peter E. Rossi, 2003. "Why Don't Prices Rise During Periods of Peak Demand? Evidence from Scanner Data," American Economic Review, American Economic Association, vol. 93(1), pages 15-37, March.
    31. John M. Blair, 1974. "Market Power and Inflation: A Short-Run Target Return Model," Journal of Economic Issues, Taylor & Francis Journals, vol. 8(2), pages 453-478, June.
    32. Fiorito, Riccardo & Kollintzas, Tryphon, 1994. "Stylized facts of business cycles in the G7 from a real business cycles perspective," European Economic Review, Elsevier, vol. 38(2), pages 235-269, February.
    33. Finn E. Kydland & Edward C. Prescott, 1990. "Business cycles: real facts and a monetary myth," Quarterly Review, Federal Reserve Bank of Minneapolis, vol. 14(Spr), pages 3-18.
    34. Waller, William S. & Shapiro, Brian & Sevcik, Galen, 1999. "Do cost-based pricing biases persist in laboratory markets?," Accounting, Organizations and Society, Elsevier, vol. 24(8), pages 717-739, November.
    35. Barnichon, Regis, 2010. "Productivity and unemployment over the business cycle," Journal of Monetary Economics, Elsevier, vol. 57(8), pages 1013-1025, November.
    36. Fabiani, Silvia & Loupias, Claire & Martins, Fernando & Sabbatini, Roberto (ed.), 2007. "Pricing Decisions in the Euro Area: How Firms Set Prices and Why," OUP Catalogue, Oxford University Press, number 9780195309287.
    37. Rotemberg, Julio J. & Woodford, Michael, 1999. "The cyclical behavior of prices and costs," Handbook of Macroeconomics, in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 16, pages 1051-1135, Elsevier.
    38. Porter, Robert H., 1983. "Optimal cartel trigger price strategies," Journal of Economic Theory, Elsevier, vol. 29(2), pages 313-338, April.
    39. Kunal Sen & Rajendra R. Vaidya, 1995. "The Determination of Industrial Prices in India: A Post Keynesian Approach," Journal of Post Keynesian Economics, Taylor & Francis Journals, vol. 18(1), pages 29-52, September.
    40. Shapiro, Carl & Stiglitz, Joseph E, 1984. "Equilibrium Unemployment as a Worker Discipline Device," American Economic Review, American Economic Association, vol. 74(3), pages 433-444, June.
    41. Bresnahan, Timothy F, 1987. "Competition and Collusion in the American Automobile Industry: The 1955 Price War," Journal of Industrial Economics, Wiley Blackwell, vol. 35(4), pages 457-482, June.
    42. Steve Buchheit & Nick Feltovich, 2011. "Experimental Evidence Of A Sunk‐Cost Paradox: A Study Of Pricing Behavior In Bertrand–Edgeworth Duopoly," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 52(2), pages 317-347, May.
    43. William A. Jackson, 2012. "Factor Shares, Business Cycles And The Distributive Loop," Metroeconomica, Wiley Blackwell, vol. 63(3), pages 493-511, July.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Plehn-Dujowich, Jose M., 2008. "On the counter-cyclicality of prices and markups in a Cournot model of entry," Economics Letters, Elsevier, vol. 99(2), pages 310-313, May.
    2. Fernando Martins, 2013. "Survey evidence on price and wage rigidities in Portugal," Working Papers w201312, Banco de Portugal, Economics and Research Department.
    3. Fernando Martins, 2015. "What Survey Data Reveal about Price and Wage Rigidity in Portugal," LABOUR, CEIS, vol. 29(3), pages 291-309, September.
    4. Gross, Marco, 2022. "Beautiful cycles: A theory and a model implying a curious role for interest," Economic Modelling, Elsevier, vol. 106(C).
    5. Du Caju, Philip & Fuss, Catherine & Wintr, Ladislav, 2009. "Understanding sectoral differences in downward real wage rigidity: workforce composition, institutions, technology and competition," Working Paper Series 1006, European Central Bank.
    6. Luigi Paciello & Andrea Pozzi & Nicholas Trachter, 2019. "Price Dynamics With Customer Markets," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 60(1), pages 413-446, February.
    7. Jan Babecký & Philip Du Caju & Theodora Kosma & Martina Lawless & Julián Messina & Tairi Rõõm, 2010. "Downward Nominal and Real Wage Rigidity: Survey Evidence from European Firms," Scandinavian Journal of Economics, Wiley Blackwell, vol. 112(4), pages 884-910, December.
    8. Lünnemann, Patrick & Wintr, Ladislav, 2010. "Downward wage rigidity and automatic wage indexation: evidence from monthly micro wage data," Working Paper Series 1269, European Central Bank.
    9. P. Du Caju & C. Fuss & L. Wintr, 2012. "Sectoral differences in downward real wage rigidity: workforce composition, institutions, technology and competition [Branchenspezifische Unterschiede in der Abwärtsreallohnstarrheit: Arbeitskrafts," Journal for Labour Market Research, Springer;Institute for Employment Research/ Institut für Arbeitsmarkt- und Berufsforschung (IAB), vol. 45(1), pages 7-22, March.
    10. Leonardo Ciambezi & Mattia Guerini & Mauro Napoletano & Andrea Roventini, 2023. "Accounting for the Multiple Sources of Inflation: an Agent-Based Model Investigation," GREDEG Working Papers 2023-14, Groupe de REcherche en Droit, Economie, Gestion (GREDEG CNRS), Université Côte d'Azur, France, revised Jun 2024.
    11. Stefano, Fasani, 2016. "Long-run Unemployment and Macroeconomic Volatility," Working Papers 352, University of Milano-Bicocca, Department of Economics, revised 18 Oct 2016.
    12. Aedín Doris & Donal O’Neill & Olive Sweetman, 2015. "Wage flexibility and the great recession: the response of the Irish labour market," IZA Journal of European Labor Studies, Springer;Forschungsinstitut zur Zukunft der Arbeit GmbH (IZA), vol. 4(1), pages 1-24, December.
    13. M. Ali Choudhary & Saima Mahmood & Sajawal Khan & Waqas Ahmed & Gylfi Zoega, 2013. "Sticky Wages in a Developing Country: Lessons from Structured Interviews in Pakistan," School of Economics Discussion Papers 0213, School of Economics, University of Surrey.
    14. Cecilia Navarra & Ermanno Tortia, 2014. "Employer Moral Hazard, Wage Rigidity, and Worker Cooperatives: A Theoretical Appraisal," Journal of Economic Issues, Taylor & Francis Journals, vol. 48(3), pages 707-726.
    15. Babecký, Jan & Du Caju, Philip & Kosma, Theodora & Lawless, Martina & Messina, Julián & Rõõm, Tairi, 2012. "How do European firms adjust their labour costs when nominal wages are rigid?," Labour Economics, Elsevier, vol. 19(5), pages 792-801.
    16. Yossi Spiegel & Konrad O. Stahl, 2014. "Industry Structure and Pricing over the Business Cycle," CESifo Working Paper Series 4848, CESifo.
    17. Druant, Martine & Fabiani, Silvia & Kezdi, Gabor & Lamo, Ana & Martins, Fernando & Sabbatini, Roberto, 2012. "Firms' price and wage adjustment in Europe: Survey evidence on nominal stickiness," Labour Economics, Elsevier, vol. 19(5), pages 772-782.
    18. Spiegel, Yossi & Stahl, Konrad, 2014. "Industry structure and pricing over the business cycle," ZEW Discussion Papers 14-039, ZEW - Leibniz Centre for European Economic Research.
    19. Iwasaki, Yuto & Muto, Ichiro & Shintani, Mototsugu, 2021. "Missing wage inflation? Estimating the natural rate of unemployment in a nonlinear DSGE model," European Economic Review, Elsevier, vol. 132(C).
    20. Jed Armstrong & Miles Parker, 2016. "How wages are set: evidence from a large survey of firms," Reserve Bank of New Zealand Discussion Paper Series DP2016/03, Reserve Bank of New Zealand.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:bla:metroe:v:66:y:2015:i:4:p:661-685. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Wiley Content Delivery (email available below). General contact details of provider: http://www.blackwellpublishing.com/journal.asp?ref=0026-1386 .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.