Abstract
This paper presents a new interpretation of the Phillips curve that rests on the process of nominal wage adjustment in a multi-sector economy. Nominal demand growth causes inflation in sectors with full employment, but it speeds up the process of employment creation in sectors with unemployment. As a result, demand-pull inflation is associated with both a reduction in the duration of unemployment and the economy wide average rate of unemployment. The paper provides empirical evidence from the US economy consistent with this claim.
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