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“The Real Wage Gap” was the internationally accepted explanation for the sudden increase in unemployment which occurred in several countries in the mid-1970s. The term “Real Wage Gap” referred to an increase in real wages relative to labour productivity and hence was a convoluted way of saying that the share of wages in national income had risen. Those proposing this hypothesis, on the basis of neo-classical analysis, failed to acknowledge that such sudden displacements in the wage share are very rare, or to examine the historical record for the consequences of past “Real Wage Gaps”. Henry Phelps Brown had examined the historical record and demonstrated the rarity of such events: he detected two occasions in the 19th century.
Richard Freeman would classify a “Real Wage Gap” as a "natural experiment".
The experimental approach involves replication, which, in the case of economics, requires examination of the historical record to detect comparable “natural experiments”; in this case to assess the impact of historical “real wage gaps”. The two 19th century “real wage gaps” detected by Phelps Brown and four which occurred in the 1960s are investigated; in no case was the neo-classical expectation of an increase in unemployment confirmed.
Nor was the Keynesian/Post-Keynesian prediction of an increase in the aggregate consumption confirmed. Therefore economists from these competing paradigms both have valuable lessons to learn from an examination of the historical record.
