The Phillips curve and long-term unemployment
This paper studies the role of long-term unemployment in the determination of prices and wages. Labor market theories such as insider-outsider models predict that this type of unemployed are less relevant in the wage formation process than the newly unemployed. This paper looks for evidence of this behavior in a set of OECD countries. For this purpose, I propose a new specification of the Phillips Curve that contains different unemployment lengths in a time-varying NAIRU setting. This is done by constructing an index of unemployment that assigns different weights to the unemployed based on the length of their spell. The results show that unemployment duration matters in the determination of prices and wages, and that a smaller weight ought to be given to the long-term unemployed. This modified model has important implications for the policy maker: It produces more accurate forecasts of inflation and more precise estimates of the NAIRU. JEL Classification: C22, E31, E50, J64
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- Laurence Ball & N. Gregory Mankiw, 2002.
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- Laurence Ball & N Gregory Mankiw, 2002. "The NAIRU in Theory and Practice," Economics Working Paper Archive 475, The Johns Hopkins University,Department of Economics.
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"Hysteresis and the European Unemployment Problem,"
427, Massachusetts Institute of Technology (MIT), Department of Economics.
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"Ranking, Unemployment Duration, and Wages,"
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Wiley Blackwell, vol. 61(3), pages 417-34, July.
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- Blackaby, David H & Hunt, Lester C, 1992. "The "Wage Curve" and Long-term Unemployment: A Cautionary Note," The Manchester School of Economic & Social Studies, University of Manchester, vol. 60(4), pages 419-28, December.
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"Productivity Growth and the Phillips Curve,"
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450, The Johns Hopkins University,Department of Economics.
- John T. Addison & Mário Centeno & Pedro Portugal, 2004.
"Reservation Wages, Search Duration, and Accepted Wages in Europe,"
w200413, Banco de Portugal, Economics and Research Department.
- Addison, John T. & Centeno, Mario & Portugal, Pedro, 2004. "Reservation Wages, Search Duration, and Accepted Wages in Europe," IZA Discussion Papers 1252, Institute for the Study of Labor (IZA).
- Acemoglu, Daron, 1995. "Public Policy in a Model of Long-Term Unemployment," Economica, London School of Economics and Political Science, vol. 62(246), pages 161-78, May.
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