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Does Micro Evidence Support the Wage Phillips Curve in Canada?

  • Jean Farès
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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
    Date of revision:
    Handle: RePEc:bca:bocawp:02-4
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    1. Abowd, J.M. & Kramarz, F. & Margolis, D.N. & Troske, K.R., 1998. "The Relative Importance of Employer and Employeee Effects on Compensation: a Comparison of France and the United States," Papiers du Laboratoire de Microéconomie Appliquée 1998-10, Université Panthéon-Sorbonne (Paris 1).
    2. Blanchard, O & Katz, L, 1996. "What We Know and Do Not Know about the Natural Rate of Unemployment," Working papers 96-29, Massachusetts Institute of Technology (MIT), Department of Economics.
    3. David Card, 1995. "The Wage Curve: A Review," Working Papers 722, Princeton University, Department of Economics, Industrial Relations Section..
    4. David G. Blanchflower & Andrew J. Oswald, 1989. "The Wage Curve," NBER Working Papers 3181, National Bureau of Economic Research, Inc.
      • Blanchflower, D. & Oswald, A., 1989. "The Wage Curve," Papers 340, London School of Economics - Centre for Labour Economics.
    5. Abowd, John M & Lemieux, Thomas, 1993. "The Effects of Product Market Competition on Collective Bargaining Agreements: The Case of Foreign Competition in Canada," The Quarterly Journal of Economics, MIT Press, vol. 108(4), pages 983-1014, November.
    6. 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.
    7. Dale T. Mortensen & Christopher A. Pissarides, 1993. "Job Creation and Job Destruction in the Theory of Unemployment," CEP Discussion Papers dp0110, Centre for Economic Performance, LSE.
    8. 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.
    9. Laurence Ball & Robert Moffitt, 2001. "Productivity Growth and the Phillips Curve," Economics Working Paper Archive 450, The Johns Hopkins University,Department of Economics.
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