IDEAS home Printed from https://ideas.repec.org/p/pre/wpaper/202107.html
   My bibliography  Save this paper

Estimating a New Keynesian Wage Phillips Curve

Author

Listed:
  • Vincent Dadam

    (University of Pretoria)

  • Nicola Viegi

    (University of Pretoria; Economic Research Southern Africa (ERSA))

Abstract

This paper estimates a New Keynesian Wage Phillips Curve for South Africa to investigate the responsiveness of nominal wages to labour market conditions. The estimation is based on a model with staggered nominal wages setting, where all variations in hired labour input is taking place at the extensive margin. First we estimate the model using aggregate data from 1971 to 2013. Aggregate estimation results show that private sector nominal wages are not very responsive to employment conditions, while they also reveal a certain sensitivity to inflation and quite a good correlation with inflation expectations. On the other hand, the relationship between nominal wage inflation and price inflation is quite strong and robust for the whole sample. However, it becomes quantitatively weak for the inflation targeting period. In that period, trade unions inflation expectations are instead strongly correlated with nominal wage inflation. In the second part of the paper we assess the response of nominal wages to employment, labour productivity and output prices, given the reservation wage, using a panel of nine industrial sectors over the period 1970-2013. The findings confirm that nominal wage inflation has consistently outpaced the growth in productivity, even after correcting for price inflation, and that employment conditions had little effect on wage dynamics. We also test for the possibility that the dynamic of wages is anchored by an underlined reservation wage to investigate the presence of an error correction term in the wage equation for South Africa. The overall picture that comes out from the analysis is that of a wage formation mechanism that is very insensitive to overall macroeconomic conditions.

Suggested Citation

  • Vincent Dadam & Nicola Viegi, 2021. "Estimating a New Keynesian Wage Phillips Curve," Working Papers 202107, University of Pretoria, Department of Economics.
    • Handle: RePEc:pre:wpaper:202107
    as

    Download full text from publisher

    File URL: http://www.up.ac.za/media/shared/61/WP/wp_2021_07.zp198261.pdf
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Abhijit Banerjee & Sebastian Galiani & Jim Levinsohn & Zoë McLaren & Ingrid Woolard, 2008. "Why has unemployment risen in the New South Africa?1," The Economics of Transition, The European Bank for Reconstruction and Development, vol. 16(4), pages 715-740, October.
    2. Olivier Blanchard & Jordi Galí, 2010. "Labor Markets and Monetary Policy: A New Keynesian Model with Unemployment," American Economic Journal: Macroeconomics, American Economic Association, vol. 2(2), pages 1-30, April.
    3. Geeta Gandhi Kingdon & John Knight, 2004. "Race and the Incidence of Unemployment in South Africa," Review of Development Economics, Wiley Blackwell, vol. 8(2), pages 198-222, May.
    4. Neil A. Rankin & Gareth Roberts, 2011. "Youth Unemployment, Firm Size And Reservation Wages In South Africa," South African Journal of Economics, Economic Society of South Africa, vol. 79(2), pages 128-145, June.
    5. P. J. Strebel, 1976. "On Built‐in Inflation, Imported Prices and the Phillips Curve: A Comment," South African Journal of Economics, Economic Society of South Africa, vol. 44(4), pages 285-291, December.
    6. Nir Klein, 2012. "Real Wage, Labor Productivity, and Employment Trends in South Africa: A Closer Look," IMF Working Papers 2012/092, International Monetary Fund.
    7. Jordi Galí, 2011. "The Return Of The Wage Phillips Curve," Journal of the European Economic Association, European Economic Association, vol. 9(3), pages 436-461, June.
    8. Marianne Bertrand & Sendhil Mullainathan & Douglas Miller, 2003. "Public Policy and Extended Families: Evidence from Pensions in South Africa," The World Bank Economic Review, World Bank, vol. 17(1), pages 27-50, June.
    9. Douglas Staiger & James H. Stock & Mark W. Watson, 1997. "The NAIRU, Unemployment and Monetary Policy," Journal of Economic Perspectives, American Economic Association, vol. 11(1), pages 33-49, Winter.
    10. Dorrit Posel & Daniela Casale, 2003. "What Has Been Happening To Internal Labour Migration In South Africa, 1993–1999?," South African Journal of Economics, Economic Society of South Africa, vol. 71(3), pages 455-479, September.
    11. Erceg, Christopher J. & Henderson, Dale W. & Levin, Andrew T., 2000. "Optimal monetary policy with staggered wage and price contracts," Journal of Monetary Economics, Elsevier, vol. 46(2), pages 281-313, October.
    12. Thorvardur Tjörvi Ólafsson, 2006. "The New Keynesian Phillips Curve: In Search of Improvements and Adaptation to the Open Economy," Economics wp31_tjorvi, Department of Economics, Central bank of Iceland.
    13. Galí, Jordi, 2010. "Monetary Policy and Unemployment," Handbook of Monetary Economics, in: Benjamin M. Friedman & Michael Woodford (ed.), Handbook of Monetary Economics, edition 1, volume 3, chapter 10, pages 487-546, Elsevier.
    14. Calvo, Guillermo A., 1983. "Staggered prices in a utility-maximizing framework," Journal of Monetary Economics, Elsevier, vol. 12(3), pages 383-398, September.
    15. J.W. Fedderke & E. Schaling, 2005. "Modelling Inflation In South Africa: A Multivariate Cointegration Analysis," South African Journal of Economics, Economic Society of South Africa, vol. 73(1), pages 79-92, March.
    16. Nicoli Nattrass & Richard Walker, 2005. "Unemployment And Reservation Wages In Working‐Class Cape Town," South African Journal of Economics, Economic Society of South Africa, vol. 73(3), pages 498-509, September.
    17. A. W. Phillips, 1958. "The Relation Between Unemployment and the Rate of Change of Money Wage Rates in the United Kingdom, 1861–1957," Economica, London School of Economics and Political Science, vol. 25(100), pages 283-299, November.
    18. Eliasson, Ann-Charlotte, 2001. "Is the Short-run Phillips Curve Nonlinear? Empirical Evidence for Australia, Sweden and the United States," Working Paper Series 124, Sveriges Riksbank (Central Bank of Sweden).
    19. Robert J. Gordon, 1997. "The Time-Varying NAIRU and Its Implications for Economic Policy," Journal of Economic Perspectives, American Economic Association, vol. 11(1), pages 11-32, Winter.
    20. Pål Boug & Ådne Cappelen & Anders Rygh Swensen, 2006. "The New Keynesian Phillips Curve for a Small Open Economy," Discussion Papers 460, Statistics Norway, Research Department.
    21. D Hodge, 2002. "Inflation Versus Unemployment in South Africa: Is There a Trade‐Off?," South African Journal of Economics, Economic Society of South Africa, vol. 70(3), pages 193-204, March.
    22. Bentolila Samuel & Saint-Paul Gilles, 2003. "Explaining Movements in the Labor Share," The B.E. Journal of Macroeconomics, De Gruyter, vol. 3(1), pages 1-33, October.
    23. Lawrence F. Katz & Olivier Blanchard, 1999. "Wage Dynamics: Reconciling Theory and Evidence," American Economic Review, American Economic Association, vol. 89(2), pages 69-74, May.
    24. JW Fedderke & Martine Mariotti, 2002. "Changing Labour Market Conditions In South Africa," South African Journal of Economics, Economic Society of South Africa, vol. 70(5), pages 830-864, June.
    25. Shapiro, Carl & Stiglitz, Joseph E, 1984. "Equilibrium Unemployment as a Worker Discipline Device," American Economic Review, American Economic Association, vol. 74(3), pages 433-444, June.
    26. Taryn Dinkelman, 2004. "How Household Context Affects Search Outcomes Of The Unemployed In Kwazulu‐Natal, South Africa," South African Journal of Economics, Economic Society of South Africa, vol. 72(3), pages 484-521, September.
    27. Kingdon, Geeta & Knight, John, 2006. "The measurement of unemployment when unemployment is high," Labour Economics, Elsevier, vol. 13(3), pages 291-315, June.
    28. Mortensen, Dale & Pissarides, Christopher, 2011. "Job Creation and Job Destruction in the Theory of Unemployment," Ekonomicheskaya Politika / Economic Policy, Russian Presidential Academy of National Economy and Public Administration, vol. 1, pages 1-19.
    29. Gordon, Robert J, 1990. "What Is New-Keynesian Economics?," Journal of Economic Literature, American Economic Association, vol. 28(3), pages 1115-1171, September.
    30. Jack Strauss & Mark E. Wohar, 2004. "The Linkage between Prices, Wages, and Labor Productivity: A Panel Study of Manufacturing Industries," Southern Economic Journal, John Wiley & Sons, vol. 70(4), pages 920-941, April.
    31. D. C. Krogh, 1967. "Growth And Inflation," South African Journal of Economics, Economic Society of South Africa, vol. 35(4), pages 294-311, December.
    32. M. L. Truu, 1975. "Inflation in the South African Economy," South African Journal of Economics, Economic Society of South Africa, vol. 43(4), pages 272-286, December.
    33. Jeremy Wakeford, 2004. "The productivity-wage relationship in South Africa: an empirical investigation," Development Southern Africa, Taylor & Francis Journals, vol. 21(1), pages 109-132.
    34. Geeta Gandhi Kingdon & John Knight, 2006. "How Flexible are Wages in Response to Local Unemployment in South Africa?," ILR Review, Cornell University, ILR School, vol. 59(3), pages 471-495, April.
    35. Kevin S. Nell, 2000. "Is Low Inflation a Precondition for Faster Growth? The Case of South Africa," Studies in Economics 0011, School of Economics, University of Kent.
    36. H. Bhorat & J. Hodge, 1999. "Decomposing Shifts in Labour Demand in South Africa," South African Journal of Economics, Economic Society of South Africa, vol. 67(3), pages 155-168, September.
    37. Lowell E. Gallaway & Rajindar K. Koshal & Gene L. Chapin, 1970. "The Relationship Between the Rate of Change in Money Wage Rates and Unemployment Levels in South Africa," South African Journal of Economics, Economic Society of South Africa, vol. 38(4), pages 262-267, December.
    38. P. Burger & M. Marinkov, 2006. "The South African Phillips Curve: How Applicable Is The Gordon Model?," South African Journal of Economics, Economic Society of South Africa, vol. 74(2), pages 172-189, June.
    39. Saten Kumar & Don J. Webber & Geoff Perry, 2012. "Real wages, inflation and labour productivity in Australia," Applied Economics, Taylor & Francis Journals, vol. 44(23), pages 2945-2954, August.
    40. P. D. F. Strydom & L. Steenkamp, 1976. "Inflation in South Africa II: Aggregate Demand and Price Expectations," South African Journal of Economics, Economic Society of South Africa, vol. 44(4), pages 266-277, December.
    41. James Heintz & Dorrit Posel, 2008. "Revisiting Informal Employment And Segmentation In The South African Labour Market," South African Journal of Economics, Economic Society of South Africa, vol. 76(1), pages 26-44, March.
    42. Yaacov Lavi & Nathan Sussman, 2001. "The Determination of Real Wages in the Long Run and its Changes in the Short Run –Evidence from Israel: 1968-1998," Bank of Israel Working Papers 2001.04, Bank of Israel.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Nicola Viegi & Vincent Dadam, 2020. "Estimating a New Keynesian Wage Phillips Curve," Working Papers 11000, South African Reserve Bank.
    2. Phiri, Andrew, 2015. "Examining asymmetric effects in the South African Philips curve: Evidence from logistic smooth transition regression (LSTR) models," MPRA Paper 64487, University Library of Munich, Germany.
    3. Temitope Leshoro & Umakrishnan Kollamparambil, 2016. "Inflation Or Output Targeting? Monetary Policy Appropriateness In South Africa," PSL Quarterly Review, Economia civile, vol. 69(276), pages 77-104.
    4. Johannes Fedderke, 2012. "The Cost of Rigidity: The Case of the South African Labor Market," Comparative Economic Studies, Palgrave Macmillan;Association for Comparative Economic Studies, vol. 54(4), pages 809-842, December.
    5. Marina Marinkov & Philippe Burger, 2006. "The South African Phillips Curve: How Applicable is the Gordon Model?," Working Papers 038, Economic Research Southern Africa.
    6. Lumengo Bonga-Bonga & Ntsakeseni Letitia Lebese, 2019. "Rethinking The Current Inflation Target Range In South Africa," Journal of Developing Areas, Tennessee State University, College of Business, vol. 53(2), pages 13-27, April-Jun.
    7. Jordi Galí, 2011. "The Return Of The Wage Phillips Curve," Journal of the European Economic Association, European Economic Association, vol. 9(3), pages 436-461, June.
    8. Frederick C.v.N. Fourie, 2011. "The South African unemployment debate: three worlds, three discourses?," SALDRU Working Papers 63, Southern Africa Labour and Development Research Unit, University of Cape Town.
    9. Phiri, Andrew, 2016. "Changes in inflation persistence prior and subsequent to the subprime crisis: What are the implications for South Africa?," MPRA Paper 70645, University Library of Munich, Germany.
    10. Nir Klein, 2012. "Real Wage, Labor Productivity, and Employment Trends in South Africa: A Closer Look," IMF Working Papers 2012/092, International Monetary Fund.
    11. Nicola Viegi, 2015. "Labour Market and Monetary Policy in South Africa," Working Papers 6607, South African Reserve Bank.
    12. Andrei Polbin & Sergey Drobyshevsky, 2014. "Developing a Dynamic Stochastic Model of General Equilibrium for the Russian Economy," Research Paper Series, Gaidar Institute for Economic Policy, issue 166P, pages 156-156.
    13. Johannes Fedderke & Yang Liu, 2018. "Inflation in South Africa: An Assessment of Alternative Inflation Models," South African Journal of Economics, Economic Society of South Africa, vol. 86(2), pages 197-230, June.
    14. Malikane, Christopher, 2012. "The Microfoundations of the Keynesian Wage-Price Spiral," MPRA Paper 42923, University Library of Munich, Germany, revised 2012.
    15. Jordi Galí, 2015. "Hysteresis and the European Unemployment Problem Revisited," NBER Working Papers 21430, National Bureau of Economic Research, Inc.
    16. Mumtaz, Haroon & Theodoridis, Konstantinos, 2020. "Dynamic effects of monetary policy shocks on macroeconomic volatility," Journal of Monetary Economics, Elsevier, vol. 114(C), pages 262-282.
    17. Abhijit Banerjee & Sebastian Galiani & Jim Levinsohn & Zoë McLaren & Ingrid Woolard, 2008. "Why has unemployment risen in the New South Africa?1," The Economics of Transition, The European Bank for Reconstruction and Development, vol. 16(4), pages 715-740, October.
    18. Dieter von Fintel, 2017. "Institutional wage-setting, labour demand and labour supply: Causal estimates from a South African pseudo-panel," Development Southern Africa, Taylor & Francis Journals, vol. 34(1), pages 1-16, January.
    19. Clemens, Marius, 2016. "Migration, Unemployment and the Business Cycle - A Euro Area Perspective," VfS Annual Conference 2016 (Augsburg): Demographic Change 145578, Verein für Socialpolitik / German Economic Association.
    20. Kumar, Anil & M. Orrenius, Pia, 2016. "A closer look at the Phillips curve using state-level data," Journal of Macroeconomics, Elsevier, vol. 47(PA), pages 84-102.

    More about this item

    Keywords

    Wage rigidities; unemployment; labour market; Phillips Curve; New Keynesian;
    All these keywords.

    JEL classification:

    • E2 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment
    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • E26 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Informal Economy; Underground Economy
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E12 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Keynes; Keynesian; Post-Keynesian; Modern Monetary Theory

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:pre:wpaper:202107. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Rangan Gupta (email available below). General contact details of provider: https://edirc.repec.org/data/decupza.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.