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the CPI and the gdp deflator have very different weight because they
are measuring two different things. One of the main reasons the deflator
shows smaller increases then the cpi is because capital equipment has
a big weight in the deflator but not in the cpi.

If you are going to use this approach use the deflater for personal
consumption expenditures rather then the gdp deflator. but also note
that the pce deflator excludes housing--about a quarter of the cpi.

The original point was that the standard theory of the firm would use output prices to calculate the nominal wage that sets the real wage equal to its marginal product, but workers use consumer prices to calculate buying power. It would appear that real wages - calculated according to how the firm would measure them - are in fact tracking productivity. The problem is that consumer prices were rising more rapidly than output prices were.

But I will take a look at alternate measures for consumer prices the next time I go through this; thanks.

Not in an open economy. Imports don't show up in the output deflator (imports aren't produced here), but they do show up in the CPI. And there may also be compositional things going on with the relative prices of investment and consumption goods. Offhand, I'm inclined to think that second point is not particularly important: increases in the cost of capital goods woule eventually show up in consumer prices. But in Canada, the role of imports in the CPI would be pretty important.

I have done enough damage on some threads elsewhere so let me just put this in the form of a question.

In the US we have a labor market where by the measure of Unemployment and real Social Security receipts (a nice proxy for wages) held up well through 2006 even as labor productivity ended up being reported at 1.6% for Q4. It still seems to be holding up, the BLS page today giving us a 4.4% unemployment rate. Now we have Q1 GDP coming in at 1.3% which as spencer suggests elsewhere means productivity right around zero. Which if true would mean that at least in the stort term the delinkage between productivity and real wages observed in the decade before 2004 has reversed itself. Welcome news if true, but seems lacking a mechanism.

So if the sharp slowdown in GDP and by extention productivity didn't hit wage rates (that should have shown in Social Security receipts) and didn't hit labor hours (ditto plus it should hit the unemployment rate) who took the hit? As yet it certainly hasn't hit Q1 earnings. Is the shock simply still rolling through the system like a tsunami in open water? If so whose beach it going to take the hit? This puzzle seems to be missing some pieces.

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