Abstract
This study develops an efficiency wage model in which workers have imperfect information about wages elsewhere. Firms’ profit-maximizing behavior results in a Phillips curve relationship. Three types of Phillips curves are derived: a wage-wage Phillips curve, a wage-price Phillips curve, and a price-price Phillips curve. The wage-wage Phillips curve is a reduced form relationship with the coefficient on lagged wage inflation equaling 1. To obtain the wage-price and the price-price Phillips curves, stochastic shocks to the growth rate of demand are modeled, yielding expressions over time for wage inflation, price inflation, and unemployment. These expressions are used in a regression of current wage or price inflation on unemployment and lagged price inflation, and it is demonstrated that the coefficient on lagged inflation asymptotically approaches 1. In addition, the model predicts that real wages are strictly procyclical in response to technology shocks, but can be either procyclical, acyclical, or countercyclical in response to demand shocks. Thus, this study can explain why economists have reached different conclusions about the cyclical behavior of real wages.
Highlights
The origins of the Phillips curve lie in Phillips’ (1958) [1] analysis of British data from 1861-1957, which finds a negative relationship between the unemployment rate and the rate of wage inflation
This study develops a model of wage setting in which firms pay efficiency wages and workers have imperfect information about average wages
The wage-price and price-price Phillips curves are obtained by modeling a series of stochastic shocks to demand, calculating expressions for wages, prices, and unemployment, and treating these expressions as data in a regression of wage or price inflation on unemployment and lagged price inflation
Summary
The origins of the Phillips curve lie in Phillips’ (1958) [1] analysis of British data from 1861-1957, which finds a negative relationship between the unemployment rate and the rate of wage inflation. The wage-wage Phillips curve is a reduced-form relationship that is derived directly from the profit-maximizing behavior of firms In this equation, the sum of coefficients on lagged wage inflation equals 1, and the coefficient on unemployment is negative and depends on just four parameters. Even when the sample size is small, the coefficient is very close to 1 when reasonable parameter values are chosen These Phillips curves are disequilibrium relationships determined from the response of wages, prices, and unemployment to exogenous demand shocks. Over time, these endogenous variables approach their equilibrium values, which means that the economy is characterized by a natural rate of unemployment. The model’s prediction that real wages can be either procyclical or countercyclical can explain why real wages appear to behave differently in different time periods
Sign-in/Register to view highlights & summary Sign-in/Register to access full text options 
Free) 
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a call
