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

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  • Robert J. Gordon

Abstract

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.

Suggested Citation

  • Robert J. Gordon, 1988. "U.S. Inflation, Labor's Share, and the Natural Rate of Unemployment," NBER Working Papers 2585, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:2585
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    1. Sargent, Thomas J, 1971. "A Note on the 'Accelerationist' Controversy," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 3(3), pages 721-725, August.
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    3. P. Frevert, 1971. "Note," Review of Economic Studies, Oxford University Press, vol. 38(2), pages 269-270.
    4. Robert E. Lucas, Jr. & Thomas J. Sargent, 1979. "After Keynesian macroeconomics," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Spr.
    5. 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.
    6. 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.
    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.
    9. 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.
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    Cited by:

    1. Murphy, Robert G., 2014. "Explaining inflation in the aftermath of the Great Recession," Journal of Macroeconomics, Elsevier, vol. 40(C), pages 228-244.
    2. Fabio Bacchini & Cristina Brandimarte & Piero Crivelli & Roberta De Santis & Marco Fioramanti & Alessandro Girardi & Roberto Golinelli & Cecilia Jona-Lasinio & Massimo Mancini & Carmine Pappalardo & D, 2013. "Building the core of the Istat system of models for forecasting the Italian economy: MeMo-It," Rivista di statistica ufficiale, ISTAT - Italian National Institute of Statistics - (Rome, ITALY), vol. 15(1), pages 17-45.
    3. Robert J. Gordon, 1997. "The Time-Varying NAIRU and Its Implications for Economic Policy," Journal of Economic Perspectives, American Economic Association, vol. 11(1), pages 11-32, Winter.
    4. Baffigi, Alberto & Bontempi, Maria Elena & Felice, Emanuele & Golinelli, Roberto, 2015. "The changing relationship between inflation and the economic cycle in Italy: 1861–2012," Explorations in Economic History, Elsevier, vol. 56(C), pages 53-70.
    5. William T. Dickens, 2008. "A new method to estimate time variation in the NAIRU," Conference Series ; [Proceedings], Federal Reserve Bank of Boston, vol. 53.
    6. Douglas Staiger & James H. Stock & Mark W. Watson, 2001. "Prices, Wages and the U.S. NAIRU in the 1990s," NBER Working Papers 8320, National Bureau of Economic Research, Inc.
    7. Pierre Fortin & George A. Akerlof & William T. Dickens & George L. Perry, 2002. "Inflation and Unemployment in the U.S. and Canada: A Common Framework," Cahiers de recherche du Département des sciences économiques, UQAM 20-16, Université du Québec à Montréal, Département des sciences économiques.
    8. Linda A. Bell & David Neumark, 1991. "Lump-Sums, Profit Sharing, and the Labor Costs in the Union Sector," NBER Working Papers 3630, National Bureau of Economic Research, Inc.
    9. Zhang, Chengsi & Murasawa, Yasutomo, 2012. "Multivariate model-based gap measures and a new Phillips curve for China," China Economic Review, Elsevier, vol. 23(1), pages 60-70.

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