Department of Economics and Business - Universitat Pompeu Fabra

Title:: The return of the wage Phillips curve
Author:: Jordi Galí
Date:: May 2009 (Revised: June 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 wage equations-starting from Phillips' (1958) original work-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:: staggered nominal wage setting, New Keynesian model, unemployment fluctuations, empirical wage equations.
JEL codes:: E24, E31, E32.
Area of Research:: Macroeconomics and International Economics

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