Measurement issues with real wage gaps in New Zealand

Abstract

This paper applies the real wage gap framework in Bruno and Sachs’ (1985) seminal work “The Economics of Worldwide Stagflation” to New Zealand. An extensive sensitivity analysis finds that using different definitions of the actual real wage can change the measured real wage gap by over 30%, but that the warranted real wage is relatively insensitive to other changes in data and methodology. The data and models used do not provide any evidence to suggest that the real wage gap plays a significant role in explaining the path of employment or unemployment in New Zealand between 1967 and 1991. Two general conclusions are possible. Either the real wage gap is not a determinant of employment or unemployment in New Zealand, or it is a determinant, but this effect cannot be isolated to measurement error in either the warranted or the actual real wage.

Notes

Department of Economics, Lincoln University, and The Treasury.