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Some considerations on the Phillips curve after the pandemic

Author

Listed:
  • Salvatore Lo Bello

    (Bank of Italy)

  • Eliana Viviano

    (Bank of Italy)

Abstract

In the economic literature, the appropriateness of the Phillips curve as a potential tool for analysing the trade-off between price stability and unemployment (or the output gap) is often questioned. This paper briefly reviews the most recent contributions to the literature on the Phillips curve (especially after the pandemic) and offers some novel evidence for the euro area. In contrast with what was documented for the US economy, we find no clear evidence of a non-linear effect of labour market slack on wage inflation. However, we do find that a model including the dynamics of both the unemployment rate and labour market tightness, above and beyond their level, substantially helps predict wage inflation in the last years. This is consistent with a strand of the literature that claims that hysteresis in the labour market is important to explain wage growth. Using our preferred specification of the Phillips curve, we find that the historically high level of labour market tightness experienced in 2022-23 has not brought about significant wage pressures so far.

Suggested Citation

  • Salvatore Lo Bello & Eliana Viviano, 2024. "Some considerations on the Phillips curve after the pandemic," Questioni di Economia e Finanza (Occasional Papers) 842, Bank of Italy, Economic Research and International Relations Area.
    • Handle: RePEc:bdi:opques:qef_842_24
    as

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    File URL: https://www.bancaditalia.it/pubblicazioni/qef/2024-0842/QEF_842_24.pdf
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    wage inflation; unemployment; labor market tightness; economic slack;
    All these keywords.

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials
    • J63 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Turnover; Vacancies; Layoffs
    • J64 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment: Models, Duration, Incidence, and Job Search

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