Six variations on fair wages and the long-run Phillips curve
AbstractThe present paper explores the connection between inflation and unemployment in different models with fair wages both in the short and in the long runs. Under customary assumptions regarding the sign of the parameters of the effort function, more inflation lowers the unemployment rate, though to a declining extent. This is because firms respond to inflation - that spurs effort by decreasing the reference wage - by increasing employment, so to maintain the effort level constant, as implied by the Solow condition. Under wage staggering this effect is stronger because wage dispersion magnifies the impact of inflation on effort. A stronger effect of inflation on unemployment is also 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. Our baseline results are robust to the adoption of a model based on reciprocity in labour relations. Therefore, we provide a new theoretical foundation for recent empirical contributions finding negative long- and short-run effects of inflation on unemployment.
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Bibliographic InfoPaper provided by University of Verona, Department of Economics in its series Working Papers with number 17/2010.
Date of creation: Nov 2010
Date of revision:
efficiency wages; money growth; long-run Phillips curve; trend inflation; wage staggering; reciprocity in labour relations;
Find related papers by JEL classification:
- E30 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - General (includes Measurement and Data)
- E20 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment - - - General (includes Measurement and Data)
- E40 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - General
- E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General
This paper has been announced in the following NEP Reports:
- NEP-ALL-2010-11-27 (All new papers)
- NEP-CBA-2010-11-27 (Central Banking)
- NEP-MAC-2010-11-27 (Macroeconomics)
- NEP-MIC-2010-11-27 (Microeconomics)
- NEP-MON-2010-11-27 (Monetary Economics)
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- 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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