ALTERNATIVE MEASURES OF EXCESS DEMAND FOR EXPLAINING MONEY WAGE INFLATION

Abstract

Whilst it is generally agreed that the key determinant of the current money wage inflation is anticipated increases in prices, there remains a significant role for excess demand variables. Many of the studies on inflation which have appeared following the original expositions of the Phillips curve relationship have been concerned with producing efficient measures of excess demand variables. In the basic model developed by Phillips and Lipsey, the key determining variable of the rate of growth of money wages was taken to be the percentage rate of unemployment in the labour force. However, several recent contributors to the literature on this type of relationship have challenged the efficiency of the level of unemployment as a measure of excess demand for labour and specifically they have produced evidence which contradicts the central assumption of stability between unemployment and aggregate excess demand. In the U.K. it has been observed how since the end of 1966, Phillips type relationships between levels of unemployment and the rate of change of money wages appear to have broken down and apparent ‘discontinuities’ in the aggregate unemployment series have been noted. All these findings taken together with some earlier U.S. studies which found poor relationships between changes in wages and unemployment levels (see, for example, the discussion in) have concentrated attention on the search for superior measures of excess demand.