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The International Element in the Phillips Curve

In: Unemployment

Author

Listed:
  • Martin Paldam

    (Aarhus University)

Abstract

A set of internal two-equation price-wage models is formulated for 17 countries. It is then demonstrated that the interconnection is much stronger than can be explained by: (i) imported inflation through import prices including exchange rate changes; (ii) the common element in total demand generated by exports; and (iii) the necessity for competitiveness as formulated in the EFO model. The unweighted average of wage increases in the countries considered is called the ż-variable and is used as a proxy for the unexplained international element. It is demonstrated that the coefficient of ż is remarkably stable over time, across countries and for different estimation techniques. It also appears to be largely unrelated to the trade shares of the countries. Only half of the ż-element is due to common long-term trends. It is often argued that the wage-push elements, i.e. those uncorrelated with labor scarcity, are generated by expectations. We thus conclude that there is a large inter-national element in expectations.

Suggested Citation

  • Martin Paldam, 1981. "The International Element in the Phillips Curve," Palgrave Macmillan Books, in: Lars Matthiessen & Steinar Strøm (ed.), Unemployment, pages 88-111, Palgrave Macmillan.
    • Handle: RePEc:pal:palchp:978-1-349-05966-9_7
    DOI: 10.1007/978-1-349-05966-9_7
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