Kiel Working Papers, Kiel Institute for World Economics
No 1795:
Fixing the Phillips Curve: The Case of Downward Nominal Wage Rigidity in the US
Stefan Reitz and Ulf. D. Slopek
Abstract: Whereas microeconomic studies point to pronounced downward
rigidity of nominal wages in the US economy, the standard Phillips curve
neglects such a feature. Using a stochastic frontier model we find
macroeconomic evidence of a strictly nonnegative error in an otherwise
standard Phillips curve in post-war data on the US nonfinancial corporate
sector. This error depends on growth in the profit ratio, output, and trend
productivity, which should all determine the flexibility of wage
adjustments. As the error usually surges during an economic downturn, the
empirical model suggests that the downward pressure on inflation arising
from higher unemployment in a standard Phillips curve framework is
significantly cushioned. This might help to understand the robustness of
inflation especially in the most recent past. In general, the cyclical
dynamics of inflation appear to be more complex than captured by a
conventional Phillips curve
Keywords: Wage rigidities; inflation dynamics; stochastic frontier model; (follow links to similar papers)
JEL-Codes: E24,; E32,; E52; (follow links to similar papers)
21 pages, September 2012
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