At time T1, when real wage W1 drops relative to the peak value W0, the cumulative real wage gap is the area A (equal to the real wage gap). At time T2, when real wage drops even further, the cumulative real wage gap is the sum of areas A and B. At time T3, the real wage starts to increase, but as it remains below the peak value, the cumulative real wage gap further deepens (A+B+C). At time T4, when the real wage increases above the peak reference value, the cumulative real wage gap starts to shrink (A+B+C+D). The growth of real wage makes the cumulative real wage gap to close at time T5 (A+B+C+D+E) and to enter into the positive territory at time T6 (A+B+C+D+E+F). The cumulative real wage gap for the above 6-period model is described in the chart. Therefore, equation (2) can be written as follows: 𝑁 𝑐𝑊𝑔𝑎𝑝 𝑇𝑁 = ∑𝑁 𝑛=1(𝑊𝑇𝑛 − 𝑊𝑇0 ) = ∑𝑛=1 𝐴𝑛 where 𝐴𝑛 is the real wage gap between 𝑇𝑛 and 𝑇𝑛−1 , expressed as area. If a new recession comes at T7 (not shown in the figures), the new peak value for the real wage is the one recorded at T6.
For example, Canada did not have a wage adjustment during the first historical period, but it experienced one during the second period. We refer to the latter as the second episode of wage adjustment in Canada. Peak years are country-specific; hence they are not the same in all countries. This means that the first wage adjustment episode, including the peak years, may have lasted, for example, 7 years in Italy, 8 years in Germany and France, 9 years in US, 20 years in Korea or 28 years (and counting) in Japan. Of the 35 countries analysed, 21 countries experienced the first historical episode of wage adjustments, 33 countries experienced the second historical episode of wage adjustments and only 2 countries experienced the third historical episode of wage adjustments. This is why the total number of observations is much higher for the second wage adjustment episode, compared against the first wage adjustment episode. In the case of the third wage adjustment episode, the total number of observations is much lower. And now we move to the juicy part. We present the graphical representation of our results for all OECD countries which experienced wage adjustments (21 countries for the first wage adjustment episode and 33 countries for the second wage adjustment episode). The results are statistically significant and with the expected sign for the first two adjustment episodes. For the third adjustment episode, the sign of the relationship is as predicted, but the number of observations is too limited to have statistical significance.