Productivity Growth and the Phillips Curve
We present a model in which workers' aspirations for wage increases adjust slowly to shifts in productivity growth. The model yields a Phillips curve with a new variable: the gap between productivity growth and an average of past wage growth. Empirically, this variable shows up strongly in the U.S. Phillips curve. Including it explains the otherwise puzzling shift in the unemployment-inflation tradeoff since 1995.
Published: Krueger, A. and R. Solow (eds.) The Roaring Nineties: Can Full Employment Be Sustained? Russell Sage Foundation, 2002.