Testing Wage and Price Phillips Curves for the United States

This paper demonstrates how the labour and product markets interact in determining as outcome a generalized reduced-form price Phillips curve. For the labour market we consider a wage Phillips curve and for the product market a price Phillips curve. We estimate separately the wage and price Phillips curves for the USA, using ordinary least squares, non-parametric estimation and three-stage least squares techniques. The finding is that wages are always more flexible than prices with respect to their respective demand pressure and that price inflation responds somewhat more to a medium-run cost pressure than does wage inflation. The implications for macroeconomic stability are demonstrated. We also show-as a link between product and labour markets-that employment is related to output as Okun's law states. In comparing linear and non-linear estimates of the wage and price Phillips curves we find furthermore that for some relationships non-linearities are important while not for others. Although overall the non-linear estimates tend to confirm our linear estimates, non-linearities in some relationships of the Phillips curve are important as well. Copyright © 2007 The Authors; Journal compilation © 2007 Blackwell Publishing Ltd.

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