An empirical investigation of the causes and consequences of inertia in wages and prices.

The thesis considers the process of adjustment in the supply side of the economy, discussing factors which might influence (nominal and real) wage and price responsiveness, and investigating these empirically using data for the UK. This contributes to the analysis of the macroeconomic consequences of supply side inflexibilities, and policy implications are drawn out. Two themes recur throughout the thesis. The first is an emphasis on the institutional detail of the supply side which suggests reasonable sources of adjustment costs and explanations for rigidities. The second is an emphasis on disaggregation in the analysis. It is argued that the interactions and interdependencies between sectors of the economy play a central role in determining the responsiveness of the supply side to shocks. In order to investigate these ideas, the empirical work makes use of data available at the industrial level. Econometric analysis of the variability of wage growth across industrial sectors and of the frequency of wage negotiations over time provides clear evidence that the speed of adjustment of nominal wages is influenced systematically by supply side conditions. Comparison of price responsiveness across industries in the UK demonstrates that the extent of product market competition is an important determinant of the speed of price adjustment A model of the UK supply side is also described, modelling employment, price, wage and output determination in each of 38 industrial sectors plus their interactions. The model provides insights on the theoretical debate on supply side behaviour, and, through simulation methods, shows the importance of inter-sectoral feedbacks in the determination of the speed and direction of adjustment in wages and prices in the face of shocks. In particular, the simulations emphasise the role of expectation formation in supply side adjustment, illustrate the presence of unemployment hysteresis, and highlight the structural implications of wage and price rigidities