Nonlinearities in the U.S. Wage Phillips Curve

46 Pages Posted: 29 Jul 2015 Last revised: 2 Dec 2015

See all articles by Luiggi Donayre

Luiggi Donayre

University of Minnesota - Duluth

Irina Panovska

University of Texas at Dallas

Date Written: December 1st, 2015

Abstract

We examine the relationship between wage inflation and the unemployment rate in the U.S. economy for the 1964-2014 period by means of a three-regime threshold regression model. The estimated threshold parameters suggest that this relationship changes when the unemployment rate transitions between regimes defined by 5.61% and 7.63%. During mild recessions and their subsequent recoveries, the time-varying estimates of the model indicate a negative relationship between both variables, consistent with the implications of a wage Phillips curve (WPC) derived from the standard New Keynesian model with staggered wage setting in Gali (2011). However, we find that this relationship breaks down during deep recessions and their recovery periods, which explains the difference between wage inflation predicted by standard New Keynesian models and the observed low wage growth in the aftermath of the 'Great Recession'. This finding and the fact that statistical tests strongly favor our three-regime model suggest that linear and two-regime models are insufficient to account for all the variability in the relationship between wage inflation and unemployment.

Keywords: Threshold Autoregression, Wage Phillips Curve, Wage Inflation, Unemployment

JEL Classification: C22, E24, E52

Suggested Citation

Donayre, Luiggi and Panovska, Irina, Nonlinearities in the U.S. Wage Phillips Curve (December 1st, 2015). Available at SSRN: https://ssrn.com/abstract=2636945 or http://dx.doi.org/10.2139/ssrn.2636945

Luiggi Donayre

University of Minnesota - Duluth ( email )

1318 Kirby Drive
Duluth, MN 55812
United States
2187268463 (Phone)

Irina Panovska (Contact Author)

University of Texas at Dallas ( email )

2601 North Floyd Road
Richardson, TX 75083
United States

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