The Return of the Wage Phillips Curve

49 Pages Posted: 1 Mar 2010

See all articles by Jordi Galí

Jordi Galí

Universitat Pompeu Fabra - Centre de Recerca en Economia Internacional (CREI); Massachusetts Institute of Technology (MIT) - Department of Economics; Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER)

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Date Written: February 2010

Abstract

The standard New Keynesian model with staggered wage setting is shown to imply a simple dynamic relation between wage inflation and unemployment. Under some assumptions, that relation takes a form similar to that found in empirical applications - starting with the original Phillips (1958) curve - and may thus be viewed as providing some theoretical foundations to the latter. The structural wage equation derived here is shown to account reasonably well for the comovement of wage inflation and the unemployment rate in the U.S. economy, even under the strong assumption of a constant natural rate of unemployment.

Keywords: New Keynesian model, staggered nominal wage setting, unemployment fluctuations

JEL Classification: E31, E32

Suggested Citation

Gali, Jordi, The Return of the Wage Phillips Curve (February 2010). CEPR Discussion Paper No. DP7700, Available at SSRN: https://ssrn.com/abstract=1559656

Jordi Gali (Contact Author)

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