Relative Price Determination in the Medium Run: The Influence of Wages, Productivity, and International Prices

Abstract

This work explores three critical assumptions of the Balassa‐Samuelson productivity differential model for the short and medium run: wage equalization, competitive labor markets, and purchasing power parity. The data reveal violations in these assumptions for France, Germany, Japan, the U.K., and the U.S. Significant wage and unit labor cost differentials exist across industries, and traded and nontraded sectors and these differentials do not diminish over time. The findings are consistent with the presence of industry and/or sectoral‐specific human capital.

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