Munich Personal RePEc Archive

The wage growth puzzle and the Philips Curve explained: recent developments

DiGabriele, Jim and Ojo, Marianne (2019): The wage growth puzzle and the Philips Curve explained: recent developments. Published in: Centre & Institute for Innovation and Sustainable Development Economic Review

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Is the Philips Curve Still Applicable in Today’s Financial Environment? The relationship between wage inflation and unemployment, is not only considered by Gali and Gambetti (2018:2) to be a “a key link of the relation between prices and economic activity” but also regarded as the focus of Phillips (1958) original work, is widely perceived to be at the heart of the "twin puzzle.” Further they add that, “the failure of wage inflation to respond sufficiently to the tightening of the labor market in recent years is generally viewed as one of the main factors behind the extremely accommodating monetary policies” at central banks like the Federal Reserve or the ECB.” Why can some economic indicators still be considered to be applicable and relevant – even in an environment where so many advancements and financial instruments have significantly altered the financial landscape which existed over the years? In particular, why can the Philips Curve still be considered applicable and relevant – with reference to wage inflation and productivity? More importantly, what economic indicators can serve to provide more reliable indicators of inflationary levels once more temporary elements, as induced by import prices, have diminished?

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