Real wage dynamics and the Phillips Curve

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Title: Real wage dynamics and the Phillips Curve
Authors: Whelan, Karl
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Date: Dec-1999
Abstract: Since Friedman (1968), the traditional derivation of the accelerationist Phillips curve has related expected real wage inflation to the unemployment rate and then invoked markup pricing and adaptive expectations to generate the accelerationist price inflation equation. Blanchflower and Oswald (1994) have argued that microeconomic evidence of a low autoregression coefficient in real wage regressions invalidates this approach, a conclusion that has been disputed widely on the grounds that the true autoregression coefficient is close to one. This paper shows that the accelerationist relationship between the change in price inflation and the unemployment rate is consistent with any type of microeconomic real wage dynamics. However, these dynamics will determine how supply shocks affect inflation. Evidence on supply shocks and inflation points against the traditional real wage formulation. Implications for the recent behavior of the NAIRU are explored.
Type of material: Working Paper
Publisher: Federal Reserve
Series/Report no.: Finance and Economics Discussion Series; No. 2000-02
Keywords: Phillips curveInflationNAIRU
Subject LCSH: Phillips curve
Wages--Effect of inflation on
Unemployment--Effect of inflation on
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Language: en
Status of Item: Not peer reviewed
Appears in Collections:Economics Research Collection

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