Forder – Wage change or price change?

Notes on the Phillips curve

Wage change or price change?

Textbooks often present ‘the Phillips curve’ as a relationship between inflation and unemployment. Actually, Phillips (1958) studied the relationship between wage change and unemployment. We might make the assumptions that all factor payments change at the same rate as wages, and that prices are a constant mark-up over costs. In that case, the wage change-unemployment and price change- unemployment are easily related:

Wage increase minus productivity increase equals price change.

 However, there is a question as to whether either of those assumptions is sufficiently nearly true in the short run for policy to be based on such a relation. On the other hand, the textbook emphasis on the inflation-unemployment relation distracts attention from the fact that understanding wage change is an important matter in economics in its own right. In fact, Phillips’ work was an early example of econometric work with that question as its focus. That was a big issue in the 1950s, as discussed in chapter 1 part 4 of James Forder, Macroeconomics and the Phillips curve myth Oxford: OUP

Commentary by James Forder, 24 September 2014