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The Most Beautiful Variations on Fair Wages and the Phillips Curve

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  • ANDREA VAONA

Abstract

This paper explores the connection between inflation and unemployment in two different models with fair wages in both the short and the long runs. Under customary assumptions regarding the sign of the parameters of the effort function, more inflation lowers the unemployment rate, albeit to a declining extent. This is because firms respond to inflation—which spurs effort by decreasing the reference wage—by increasing employment, thus maintaining the effort level constant as implied by the Solow condition. A stronger short‐run effect of inflation on unemployment is produced under varying as opposed to fixed capital, given that in the former case the boom produced by a monetary expansion is reinforced by an increase in investment. Therefore, I provide a new theoretical foundation for recent empirical contributions that find negative long‐ and short‐run effects of inflation on unemployment.

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  • Andrea Vaona, 2013. "The Most Beautiful Variations on Fair Wages and the Phillips Curve," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 45(6), pages 1069-1084, September.
    • Handle: RePEc:wly:jmoncb:v:45:y:2013:i:6:p:1069-1084
    DOI: 10.1111/jmcb.12044
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    Cited by:

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    2. Mewael Tesfaelassie & Maik Wolters, 2018. "The Impact of Growth on Unemployment in a Low vs. High Inflation Environment," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 28, pages 34-50, April.
    3. Ahrens, Steffen & Snower, Dennis J., 2014. "Envy, guilt, and the Phillips curve," Journal of Economic Behavior & Organization, Elsevier, vol. 99(C), pages 69-84.
    4. Murota, Ryu-ichiro, 2019. "Negative interest rate policy in a permanent liquidity trap," MPRA Paper 93498, University Library of Munich, Germany.
    5. Miura, Shogo, 2023. "Optimal inflation rate and fair wage," The Quarterly Review of Economics and Finance, Elsevier, vol. 88(C), pages 158-167.
    6. Andrea Vaona, 2013. "Inflation gifts and endogenous growth through learning-by-doing," Working Papers 09/2013, University of Verona, Department of Economics.

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