Working Paper: CEPR ID: DP13452
Authors: Jordi Gal; Luca Gambetti
Abstract: Unconditional reduced form estimates of a conventional wage Phillips curve for the U.S. economy point to a decline in its slope coefficient in recent years, as well as a shrinking role of lagged price inflation in the determination of wage inflation. We provide estimates of a conditional wage Phillips curve, based on a structural decomposition of wage, price and unemployment data generated by a VAR with time varying coefficients, identified by a combination of long-run and sign restrictions. Our estimates show that the key qualitative findings from the unconditional reduced form regressions also emerge in the conditional evidence, suggesting that they are not entirely driven by endogeneity problems or possible changes over time in the importance of of wage markup shocks. The conditional evidence, however, suggests that actual changes in the slope of the wage Phillips curve may not have been as large as implied by the unconditional estimates.
Keywords: Inflation targeting; Sacrifice ratio; Wage rigidities; Time-varying structural vector autoregressive models
JEL Codes: E24; E31
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| wage inflation (J31) | unemployment (J64) |
| unemployment (J64) | wage inflation (J31) |
| wage inflation (J31) | sensitivity to unemployment (J64) |