Wage Inflation and the Structure of Regional Unemployment: Comment

Abstract

Frank Brechling's paper could well serve as a model for other authors. It is both imaginative and clear in its development of formal theory, and follows through with relevant econometric testing and estimation. Such basic work on the underpinnings of the Phillips relation is badly needed. Taking off from the work by Lipsey and Archibald that stresses the importance of the geographic segmentation of the labor market, Brechling considers two hypotheses for relating sectoral imbalances to the wage inflation-unemployment trade-off of the American economy. The first is the familiar aggregation of nonlinear local Phillips curves. The second provides for spillover effects through expectations from tight sectors to looser ones. One minor slip in the theoretical derivation should be avoided in the future. The aggregation of wage rates in equation (2) should use the fraction of earnings for sectoral weighting while in equation (6) the fraction of labor force should be used for sectoral weighting instead. In the theory development for the nonlinear aggregation hypothesis, the assumption is used that all sectoral Phillips relations are identical. However, empirical evidence indicates that this is not likely to be true, particularly because of different turnover rates in different sectors.l Since it is the nonlinearity of the local curves that causes the aggregate inflation rate to be increased by the dispersion of unemployment, Brechling only needs to assume identical slopes for local curves. Their levels may differ. Uniform sectoral unemployment rates would still give the minimum aggregate wage inflation rate, but the wage inflation rates would differ systematically by sector and his second deftnition of long run which leads to equation (11) would be suspect, i.e., that the expected inflation rate in each sector was equal to the aggregate inflation rate. Clearly, if inflation rates differ by sector, the relative wage structure will drift and this would induce the movement of demand and supply between sectors. Thus we need to develop the theory of the intersectoral adjustment process on a much more basic level than simply through the expectation formation process. One may question the label of dynamic market interdependence which Brech-