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Does Micro Evidence Support the Wage Phillips Curve in Canada?

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  • Jean Farès
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    File URL: http://www.bankofcanada.ca/wp-content/uploads/2010/02/wp02-4.pdf
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    Paper provided by Bank of Canada in its series Working Papers with number 02-4.

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    Length: 36 pages Abstract: The existing macroeconometric evidence lends support to the wage Phillips curve by showing a negative relation between the rate of change in wages and the unemployment rate, conditional on lagged price inflation. Most theoretical models of wage setting, however, generate a "wage curve," described by a negative relation between the level of the real wage and unemployment. Real wage dynamics have important implications for how shocks affect aggregate consumer price inflation, and for the determination of the natural rate of unemployment. This paper examines the dynamics of the aggregate wages in Canada, and tests whether real wages and unemployment have a long-term level relationship. The results indicate that a simple aggregate wage Phillips curve continues to describe the behaviour of aggregate wages in Canada quite well. The micro evidence, however, does not unequivocally support one specification against the other; rather, what seems to emerge is more complex wage dynamics better described in an error-correction specification. Wage changes reflect the short-run movement in the unemployment rate, while they adjust towards a long-run equilibrium level, as could be described in a wage curve model.
    Date of creation: 2002
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    Handle: RePEc:bca:bocawp:02-4

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    Keywords: Inflation and prices;

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    1. Mortensen, Dale T & Pissarides, Christopher A, 1994. "Job Creation and Job Destruction in the Theory of Unemployment," Review of Economic Studies, Wiley Blackwell, vol. 61(3), pages 397-415, July.
    2. repec:fth:prinin:343 is not listed on IDEAS
    3. Abowd, John M. & Kramarz, Francis & Margolis, David N. & Troske, Kenneth R., 2001. "The Relative Importance of Employer and Employee Effects on Compensation: A Comparison of France and the United States," Journal of the Japanese and International Economies, Elsevier, vol. 15(4), pages 419-436, December.
    4. Blanchflower, D. & Oswald, A., 1989. "The Wage Curve," Papers 340, London School of Economics - Centre for Labour Economics.
    5. Olivier Blanchard & Lawrence F. Katz, 1997. "What We Know and Do Not Know about the Natural Rate of Unemployment," Journal of Economic Perspectives, American Economic Association, vol. 11(1), pages 51-72, Winter.
    6. Shapiro, Carl & Stiglitz, Joseph E, 1984. "Equilibrium Unemployment as a Worker Discipline Device," American Economic Review, American Economic Association, vol. 74(3), pages 433-44, June.
    7. Dave Turner & Pete Richardson & Sylvie Rauffet, 1996. "Modelling the Supply Side of the Seven Major OECD Economies," OECD Economics Department Working Papers 167, OECD Publishing.
    8. John M. Abowd & Thomas Lemieux, 1991. "The Effects of Product Market Competition on Collective Bargaining Agreements: The Case of Foreign Competition in Canada," NBER Working Papers 3808, National Bureau of Economic Research, Inc.
    9. David Card, 1995. "The Wage Curve: A Review," Journal of Economic Literature, American Economic Association, vol. 33(2), pages 285-299, June.
    10. Laurence Ball & Robert Moffitt, 2001. "Productivity Growth and the Phillips Curve," NBER Working Papers 8421, National Bureau of Economic Research, Inc.
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    Cited by:
    1. Louis Christofides & Chen Peng, 2006. "Major Provisions of Labour Contracts and their Theoretical Coherence," CESifo Working Paper Series 1700, CESifo Group Munich.

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