256 Brookings Papers on Economic Activity, 1:1979

ConcludingRemarks

This paper is intended to be descriptiverather than analytical.For greaterinsight, a model of industrialprice-output performance should be estimated,but the national accounts do not provide all the information neededfor that purposeand are especiallyweak on capital. Much work has been done on an annualmodel with four equationsfor each industry: demandfor labor as a function of real output and the relativeprice of labor, supplyof labor as a functionof the industry'swage rate compared to the overallwage rate, demandfor real outputas a functionof real GNP and the relativeprice of output,and price as a functionof the wage rate andlabor productivity. When the resultsof this effort are ready for presentation,they might provideinsight into the principalfindings of this paper-particularly the negative price-quantitycorrelation both within and across industries- by distinguishingbetween explanatoryfactors peculiarto each industry ("technicalchange") and more generalmacroeconomic influences.

Discussion

Two POSSIBLE EXPLANATIONS were seen by William Nordhausfor the negativecorrelation between price changesand outputchanges by indus- try. One was exogenous differencesin productivitygrowth, which shift supply curves outwardby varying amounts;the other was economiesof scale that could be realizedbecause of outwardshifts in demandcurves. He emphasizedthat it was difficultto distinguishbetween the two, and yet importantto disentanglethem. For example,economies of scale could, in principle, explain the marked slowdown in labor productivityin all majorindustrial countries since 1973. Accordingto that view, the slow growthof demandwould have more than a purelycyclical adverseeffect on productivity.He mentionedthat Japaneseengineers and economists point to the slow growthin their exportdemand as a cause of less robust investment,raising the averageage of equipmentand retarding the growth in productivity. HendrikS. Houthakker 257 MichaelWachter felt that the negativecorrelation of long-runchanges in prices and quantitiesacross industries was understandable.But he was puzzled by the predominantlynegative correlationyear-to-year within each industry.James Duesenberrysuggested that industriesgo through variousgrowth phases; in a rapidgrowth phase, an industrywould enjoy economiesof scale, new technology,or the vintageeffects of new capital, and it would displaymore rapidgrowth of outputand lower increasesof relativeprices than in otherphases of its development.That couldproduce the patternHouthakker found in the time series withinindustries. Nord- haus noted that such an explanationrequired year-to-year differences in the growthof productivityto be more importantwithin an industrythan year-to-yearvariations in the growthof demand. In responseto a question,Houthakker explained that the acceleration in overall inflation and concomitantslowdown in real GNP duringthe 1970s could not accountfor his time-seriesresults because the findings hold withinsubperiods and also wheninflation for an industryis measured relativeto the inflationrate throughoutthe economy.Peter Clarkfelt that lagged changes in prices should be included in the industrytime-series equationsto determinewhether there is a microeconomicanalog to the macromomentum effect of inflation. John Norsworthycautioned that the value-addeddata were weak. For manyservice industries, output measures were derivedfrom dataon labor input. In addition, the calculationsof value added are based on inter- mediateinputs from an input-outputtable for 1967, and those estimates are likely to be inappropriatefor recentperiods in whichrelative prices of inputshave changedsubstantially. Norsworthy suggested that it mightbe worthwhileto split the data before and after 1973 and to omit some in- dustriesthat aremeasured poorly. RobertGordon and GeorgePerry felt that Houthakker'smicro results did not containany macromysteries. Perry noted that the transmissionof strong aggregatedemand into inflation worked mainly through labor marketsand that it would not be expectedto createpositive correlations betweenoutput and prices at a microlevel.