First, the sluggish pace of nominal and real wage growth in recent years may reflect the phenomenon of “pent-up wage deflation”.15 The evidence suggests that many firms faced significant constraints in lowering compensation during the recession and the earlier part of the recovery because of “downward nominal wage rigidity” – namely, an inability or unwillingness on the part of firms to cut nominal wages.
One only has to look at the extreme differences in economic performance between South and North Korea, or West and (formerly) East Germany to see how different institutions can outweigh the same geography, culture and resources.