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What a Puzzle! Unravelling Why UK Phillips Curves were Unstable

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  • Jennifer L. Castle
  • David F. Hendry

Abstract

The UK relationship between nominal wage inflation and the unemployment rate is unstable. Over sub‐periods of the last 160 years of turbulent data, Phillips curve slopes range from strongly negative, slightly negative, flat, slightly positive and strongly positive. Our constant‐parameter congruent model of real wages explains these instabilities, yet also implies a constant negative relationship between nominal wage inflation and the unemployment rate when corrected by its regressors. Disentangling these effects reveals that structural breaks in the real‐wage model's variables do not explain the instabilities, which instead occur during sub‐periods when some of its explanatory variables are insignificant.

Suggested Citation

  • Jennifer L. Castle & David F. Hendry, 2024. "What a Puzzle! Unravelling Why UK Phillips Curves were Unstable," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 86(4), pages 743-760, August.
    • Handle: RePEc:bla:obuest:v:86:y:2024:i:4:p:743-760
    DOI: 10.1111/obes.12615
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    References listed on IDEAS

    as
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    2. Tor Jacobson & Anders Vredin & Anders Warne, 1998. "Are Real Wages and Unemployment Related?," Economica, London School of Economics and Political Science, vol. 65(257), pages 69-96, February.
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    4. Charles Feinstein, 1990. "New estimates of average earnings in the United Kingdom, 1880-19131," Economic History Review, Economic History Society, vol. 43(4), pages 595-632, November.
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    7. Forder, James, 2014. "Macroeconomics and the Phillips Curve Myth," OUP Catalogue, Oxford University Press, number 9780199683659.
    8. Jennifer L. Castle & Jurgen A. Doornik & David F. Hendry & Felix Pretis, 2015. "Detecting Location Shifts during Model Selection by Step-Indicator Saturation," Econometrics, MDPI, vol. 3(2), pages 1-25, April.
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    Cited by:

    1. Petz, Nico & Zörner, Thomas O., 2026. "How Phillips curve dynamics enhance business cycle synchronization analysis in Central and Eastern Europe," Journal of International Money and Finance, Elsevier, vol. 161(C).

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