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Modelling the heuristic dynamics of the wage and price curve model of equilibrium unemployment

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Abstract

A standard model of equilibrium unemployment consists of static equations for real wage ambitions (wage curve) and real wage scope (price curve), which jointly determine the NAIRU. The heuristics of the model states that unless the rate of unemployment approaches the NAIRU from any given initial value, inflation will be increasing or decreasing over time. We formalize this influential heuristic argument with the aid of a dynamic model of the wage-price spiral where the static theory's equations are re-interpretated as attractor relationships. We show that NAIRU unemployment dynamics are sufficient but not necessary for inflation stabilization, and that the dynamic wage-price spiral model generally has a dynamically stable solution for any pre-determined rate of unemployment. We also discuss a restricted version of the model that conforms to the accelerationist view that inflation increases/falls if unemployment is not at its 'natural rate'.

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  • Dag Kolsrud & Ragnar Nymoen, 2012. "Modelling the heuristic dynamics of the wage and price curve model of equilibrium unemployment," Discussion Papers 671, Statistics Norway, Research Department.
  • Handle: RePEc:ssb:dispap:671
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    1. David G. Blanchflower & Andrew J. Oswald, 1995. "The Wage Curve," MIT Press Books, The MIT Press, edition 1, volume 1, number 026202375x, January.
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    3. Forslund, Anders & Gottfries, Nils & Westermark, Andreas, 2005. "Real and nominal wage adjustment in open economies," Working Paper Series 2005:23, IFAU - Institute for Evaluation of Labour Market and Education Policy.
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    6. Bardsen, Gunnar & Eitrheim, Oyvind & Jansen, Eilev S. & Nymoen, Ragnar, 2005. "The Econometrics of Macroeconomic Modelling," OUP Catalogue, Oxford University Press, number 9780199246502.
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    8. Hoel, Michael & Nymoen, Ragnar, 1988. "Wage formation in norwegian manufacturing: An empirical application of a theoretical bargaining model," European Economic Review, Elsevier, vol. 32(4), pages 977-997, April.
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    Keywords

    AS-AD; equilibrium-correction; imperfect competition; macroeconomics; NAIRU; Phillips curve; unemployment; wage-price spiral.;

    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
    • E30 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - General (includes Measurement and Data)
    • J50 - Labor and Demographic Economics - - Labor-Management Relations, Trade Unions, and Collective Bargaining - - - General

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