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Real wages, inflation and unemployment

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  • Palle S. Andersen
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    Abstract

    This paper summarises the main features of an expectations-augmented Phillips curve with accompanying mark-up price equations. The empirical counterparts for six countries are presented. Even though preliminary, the results are relatively satisfactory in terms of statistical fit and a priori expectations with respect to the sign and size of the parameters. However, in periods when both inflation and unemployment have increased far above historical trends, it is somewhat unsatisfactory to assume that the level of unemployment is exogenous and independent of the inflation process. Moreover, considering the simultaneous changes in relative prices and real wages, there would seem to be some merit in incorporating these variables – directly and indirectly – in the wage formation process.

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    Bibliographic Info

    Paper provided by Bank for International Settlements in its series BIS Working Papers with number 9.

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    Length: 47 pages
    Date of creation: Jul 1984
    Date of revision:
    Handle: RePEc:bis:biswps:9

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    1. McCallum, Bennett T, 1976. "Rational Expectations and the Natural Rate Hypothesis: Some Consistent Estimates," Econometrica, Econometric Society, vol. 44(1), pages 43-52, January.
    2. Malinvaud, Edmond, 1982. "Wages and Unemployment," Economic Journal, Royal Economic Society, vol. 92(365), pages 1-12, March.
    3. Roth, Jürgen, 1982. "Mehr Beschäftigung durch Reallohnzurückhaltung: Zum Streit zwischen kosten- und nachfrageorientierter Lohnpolitik," Kiel Discussion Papers 85, Kiel Institute for the World Economy (IfW).
    4. Pitchford, J. D., 1981. "A consistent model of the expectations augmented Phillips curve and inflation," Journal of Macroeconomics, Elsevier, vol. 3(4), pages 489-499.
    5. William H. Branson & Julio J. Rotemberg, 1979. "International Adjustment with Wage Rigidity," NBER Working Papers 0406, National Bureau of Economic Research, Inc.
    6. Rosen, Harvey S & Quandt, Richard E, 1978. "Estimation of a Disequilibrium Aggregate Labor Market," The Review of Economics and Statistics, MIT Press, vol. 60(3), pages 371-79, August.
    7. Morley, R, 1979. "Profit, Relative Prices and Unemployment," Economic Journal, Royal Economic Society, vol. 89(355), pages 582-600, September.
    8. Hickman, Bert G & Klein, Lawrence R, 1984. "Wage-Price Behavior in the National Models of Project LINK," American Economic Review, American Economic Association, vol. 74(2), pages 150-54, May.
    9. Kahn, George A, 1984. "International Differences in Wage Behavior: Real, Nominal, or Exaggerated?," American Economic Review, American Economic Association, vol. 74(2), pages 155-59, May.
    10. McCallum, B T, 1974. "Wage Rate Changes and the Excess Demand for Labour: An Alternative Formulation," Economica, London School of Economics and Political Science, vol. 41(163), pages 269-77, August.
    11. Taylor, Jim & Cunningham, Jim, 1982. "Profit, Relative Prices and Unemployment: A Comment," Economic Journal, Royal Economic Society, vol. 92(365), pages 161-69, March.
    12. Grubb, David B. & Jackman, Richard & Layard, Richard, 1983. "Wage rigidity and unemployment in OECD countries," European Economic Review, Elsevier, vol. 21(1-2), pages 11-39.
    13. Jeffrey D. Sachs, 1979. "Wages, Profits, and Macroeconomic Adjustment: A Comparative Study," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 10(2), pages 269-332.
    14. Wadhwani, Sushil B, 1985. "Wage Inflation in the United Kingdom," Economica, London School of Economics and Political Science, vol. 52(206), pages 195-207, May.
    15. Morley, R, 1982. "Profit, Relative Prices and Unemployment: A Reply," Economic Journal, Royal Economic Society, vol. 92(365), pages 170-73, March.
    16. Agarwala, R, et al, 1972. "A Neo-classical Approach to the Determination of Prices and Wages," Economica, London School of Economics and Political Science, vol. 39(155), pages 250-63, August.
    17. George L. Perry, 1983. "What Have We Learned about Disinflation," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 14(2), pages 587-602.
    18. Jeffrey D. Sachs, 1983. "Real Wages and Unemployment in the OECD Countries," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 14(1), pages 255-304.
    19. Ormerod, Paul, 1982. "Rational and Non-Rational Expectations of Inflation in Wage Equations for the United Kingdom," Economica, London School of Economics and Political Science, vol. 49(196), pages 375-87, November.
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