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Long-term unemployment and convexity in the Phillips curve

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  • Speigner, Bradley

    (Bank of England)

Abstract

The notion that the long-term unemployed are relatively detached from the labour market and therefore exert only little downward pressure on wage inflation has regained significant traction recently. This paper investigates whether the conclusion that long-term unemployment is only weakly related to inflation depends on the assumption of linearity in the Phillips curve. Specifically, once convexity is allowed for during the estimation process, long-term unemployment appears to have a significant negative influence on wage inflation, whereas in a linear Phillips curve model it is only the short-term unemployment rate that matters for wage dynamics. The intuition is simple; by the time the long-term unemployment rate rises during a recession, the economy may have already transitioned into a relatively flat region of the Phillips curve, generating the misperception that the marginal effect of long-term unemployment on wage inflation is smaller than that of short-term unemployment. Linear models which do not capture state dependence in the slope of the Phillips curve would therefore bias downwards the estimated importance of long-term unemployment in explaining wage dynamics if the true Phillips curve is convex.

Suggested Citation

  • Speigner, Bradley, 2014. "Long-term unemployment and convexity in the Phillips curve," Bank of England working papers 519, Bank of England.
    • Handle: RePEc:boe:boeewp:0519
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Davide Romaniello, 2022. "Unemployment gap, isteresi e disoccupazione di lunga durata: quale ruolo nella comprensione dell'inflazione? (Unemployment gap, hysteresis and long-term unemployment: which role in explaining inflatio," Moneta e Credito, Economia civile, vol. 75(299), pages 267-283.
    2. Juan Carlos Berganza & Pedro del Río & Fructuoso Borrallo, 2016. "Determinants and implications of low global inflation rates," Occasional Papers 1608, Banco de España.
    3. Jeremy J. Nalewaik, 2016. "Non-Linear Phillips Curves with Inflation Regime-Switching," Finance and Economics Discussion Series 2016-078, Board of Governors of the Federal Reserve System (U.S.).
    4. Paternesi Meloni, Walter & Romaniello, Davide & Stirati, Antonella, 2022. "Inflation and the NAIRU: assessing the role of long-term unemployment as a cause of hysteresis," Economic Modelling, Elsevier, vol. 113(C).
    5. Marko Melolinna & Máté Tóth, 2019. "Output gaps, inflation and financial cycles in the UK," Empirical Economics, Springer, vol. 56(3), pages 1039-1070, March.
    6. Melolinna, Marko & Tóth, Máté, 2016. "Output gaps, inflation and financial cycles in the United Kingdom," Bank of England working papers 585, Bank of England.
    7. Ricardo Summa & Julia Braga, 2020. "The (conflict-augmented) Phillips Curve is alive and well," Working Papers 0055, ASTRIL - Associazione Studi e Ricerche Interdisciplinari sul Lavoro.
    8. Esady, Vania & Speigner, Bradley & Wanengkirtyo, Boromeus, 2023. "Revisiting the effects of long-term unemployment on inflation: the role of non-linearities," Bank of England working papers 1018, Bank of England.

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    More about this item

    Keywords

    Phillips curve; convexity; natural rate of unemployment; Kalman filter; long-term unemployment; hysteresis;
    All these keywords.

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • J64 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment: Models, Duration, Incidence, and Job Search

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