Author(s): Jeffrey D. Sachs and Robert J. Gordon
Source: Brookings Papers on Economic Activity, Vol. 1983, No. 1 (1983), pp. 255-304 Published by: Brookings Institution Press
Stable URL: https://www.jstor.org/stable/2534357

AN ACTIVE DEBATE iS now under way in the United States, Europe, and Japan about the scope for expansionary macroeconomic policies in the near term. Although unemployment is at postwar historical highs in Europe and the United States and inflation has receded rapidly in the major economies of the Organization for Economic Cooperation and Development, there is remarkable reticence in advocating expansionary policies among the governments of OECD countries. One school of thought holds that much of the unemployment problem in Europe, and to a lesser extent in the United States and Japan, results from real wages at inappropriate levels and thus the problem cannot be ameliorated by adjusting demand-management policies. The West German Minister of Economics strongly enunciated this view. '

Nevertheless, our economies are still carrying the burden of an excessive real wage level from the seventies. A considerable part of current unemployment is due to the fact that labour has now become too expensive.
. . . However, correcting false distribution relations needs time. A start has been made in most of the major industrial countries. The course must be held over the medium term if a growth process which does not bring with it a danger of inflation is to be set in motion and sustained.

Because this view has gained widespread currency, and because I took this position under different circumstances in my 1979 BPEA paper, it is opportune to reexamine the arguments in light of recent circumstances.

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