Unit Labor Costs and the Price Level

The “price markup” hypothesis says that prices are marked up over productivity-adjusted wages, implying that prices and wages must be correlated in the long run and that short-run movements in wages help predict short-run movements in prices. The empirical evidence reported here indicates that these implications are consistent with the data when prices are narrowly measured by the consumer price index, but not when they are broadly measured by the implicit GDP deflator. The general price level is correlated with labor costs in the long run, but the presence of this correlation appears to be due to Granger-causality running from prices to labor costs, not the other way around