ABSTRACT

Real Wage Dynamics and the Phillips Curve (September 2002).

Since Friedman (1968), the accelerationist Phillips curve has been derived by relating expected real wage inflation to unemployment. Blanchflower and Oswald (1994) suggested that microeconomic evidence of a low autoregression coefficient for real wages invalidates this approach, a conclusion that has been disputed widely on the grounds that this coefficient is actually close to one. This paper shows that the accelerationist Phillips curve is consistent with any type of microeconomic real wage dynamics. However, these dynamics will determine how supply shocks affect inflation. Evidence on supply shocks and U.S. inflation points against the traditional real wage formulation. Implications for the recent behavior of the U.S. NAIRU are explored.