The Return of the Wage Phillips Curve
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.
I have benefited from comments during presentations at the CREI Macro Lunch, the Reserve Bank of Australia, Reserve Bank of New Zealand, U. Rovira i Virgili, NBER Summer Institute, Kiel EES Workshop, New York Fed, Columbia, NYU and Oxford University. Tomaz Cajner and Lien Laureys provided excellent research assistance. I am grateful to the European Research Council, the Ministerio de Ciencia e Innovación, the Barcelona GSE Research Network and the Government of Catalonia for financial support. The views expressed herein are those of the author and do not necessarily reflect the views of the National Bureau of Economic Research.
Jordi Galí, 2011. "The Return Of The Wage Phillips Curve," Journal of the European Economic Association, John Wiley & Sons, Ltd., vol. 9(3), pages 436-461, 06. citation courtesy of