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Inflation-Unemployment Tradeoff and Regional Labor Market Data

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  • Hassler, Uwe
  • Neugart, Michael

Abstract

We estimate a linear and a piecewise linear Phillips curve model with regional labor market data for West German and Neue Länder. Employing regional observations allows us to country difference the data. This eliminates, under the assumption of homogeneous Länder, supply shocks and changes in the formation of expectations as possible identification failures. With seemingly unrelated regressions we find a flat Phillips curve in the Neue Länder. For the West German Länder a piecewise linear model with a higher inflation-unemployment tradeoff for the regime of low unemployment rates fits the data very well. The results hold true if we control for endogeneity of the unemployment rate. With a kinked but upward sloping aggregate supply curve there seems to be room for stabilization policies, at least in the range of aggregate demand shifts that our data covers.

Suggested Citation

  • Hassler, Uwe & Neugart, Michael, 2009. "Inflation-Unemployment Tradeoff and Regional Labor Market Data," Publications of Darmstadt Technical University, Institute for Business Studies (BWL) 77560, Darmstadt Technical University, Department of Business Administration, Economics and Law, Institute for Business Studies (BWL).
  • Handle: RePEc:dar:wpaper:77560
    Note: for complete metadata visit http://tubiblio.ulb.tu-darmstadt.de/77560/
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    JEL classification:

    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation

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