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U.S. Inflation, Labor's Share, and the Natural Rate of Unemployment

  • Robert J. Gordon

The Phillips curve was init-ally formulated as a relationship between the rate of change and unemployment, yet what matters for stabilization policy is the rate of inflation, not the rate of wage change. This paper provides new estimates of Phillips curves for both prices and wages extending over the full 1954-87 period and several sub-periods. The most striking result in the paper is that wage changes do not contribute statistically to the explanation of inflation. Deviations in the growth of labor cost from the path of inflation cause changes in labor's income share, and changes in the profit share in the opposite direction, but do not feed back to the inflation rate. Additional findings are that the U.S. natural unemployment is still 6 percent, with no decline in the 1980s in response to the reversal of the demographic shifts that had raised the natural rate in the 1960s and 1970s. The U. S. inflation process is stable, with no evidence of structural shifts over the 1954-87 period. But the wage process is not stable: low rates of wage change in 1981-87 cannot be accurately predicted by wage equations estimated through 1980. Rather than representing a "new regime," wage behavior in the 1980s is the outcome of a longer-term process. The 1980s have witnessed a substantial decline in labor's income share that partly reverses the even larger increase in labor's share that occurred between 1965 and 1978.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 2585.

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Date of creation: May 1988
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Publication status: published as Economics of Wage Determination, edited by Heinz Konig, pp. 1-34. New York: Springer Verlag, 1990.
Handle: RePEc:nbr:nberwo:2585
Note: EFG
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  1. Perloff, Jeffrey M. & Wachter, Michael L., 1979. "A production function--nonaccelerating inflation approach to potential output : Is measured potential output too high?," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 10(1), pages 113-163, January.
  2. Edward M. Gramlich, 1979. "Macro Policy Responses to Price Shocks," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 10(1), pages 125-166.
  3. Robert E. Lucas, Jr. & Thomas J. Sargent, 1979. "After Keynesian macroeconomics," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Spr.
  4. Olivier J. Blanchard, 1986. "Empirical Structural Evidence On Wages, Prices and Employment in the US," Working papers 431, Massachusetts Institute of Technology (MIT), Department of Economics.
  5. George L. Perry, 1970. "Changing Labor Markets and Inflation," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 1(3), pages 411-448.
  6. Sargent, Thomas J, 1971. "A Note on the 'Accelerationist' Controversy," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 3(3), pages 721-25, August.
  7. Lucas, Robert Jr, 1976. "Econometric policy evaluation: A critique," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 1(1), pages 19-46, January.
  8. William Fellner, 1979. "The Credibility Effect and Rational Expectations: Implications of the Gramlich Study," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 10(1), pages 167-190.
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