Robert Gordon revisits the Phillips Curve

"Friedman and Phelps on the Phillips Curve Viewed from a Half Century's Perspective" a new NBER working paper by Robert J. Gordon.

Abstract:

In the late 1960s the stable negatively sloped Phillips Curve (PC) was overturned by the Friedman-Phelps natural rate model.  Their PC was vertical in the long run at the natural unemployment rate, and their short-run curve shifted up whenever unemployment was pushed below the natural rate.   

This paper criticizes the underlying assumption of the Friedman-Phelps approach that the labor market continuously clears and that changes in unemployment down or up occur only in response to "fooling" of workers, firms, or both.   A preferable and resolutely Keynesian approach explains quantity rationing by inertia in price and wage setting.  The positive correlation of inflation and unemployment in the 1970s and again in the 1990s is explained by joining the negatively sloped Phillips Curve with a positively sloped dynamic demand curve.  For any given growth of nominal GDP, higher inflation caused by adverse supply shocks implies slower real GDP growth and higher unemployment.  

This "triangle" model based on inflation inertia, demand, and supply worked well to explain why inflation and unemployment were both positively and negatively correlated between the 1960s and 1990s, but in the past decade the slope of the short-run Phillips Curve has flattened as inflation exhibited a muted response to high unemployment in 2009-13 and low unemployment in 2016-2018.   

It remains to be seen whether a continuation of low unemployment will cause a
modest and fixed extra amount of inflation, thus reviving the stable Phillips curve of the early 1960s, or whether inflation will continuously accelerate as Friedman and Phelps would have predicted.

Gated version available here. 

The Lack of Wage Growth and the Falling NAIRU; "Underemployment reduces wage pressure."

From an NBER Working Paper by David N.F. Bell and David G. Blanchflower released today

Abstract:

There remains a puzzle around the world over why wage growth is so benign given the unemployment rate has returned to pre-recession levels.  It is our contention that a considerable part of the explanation is the rise in underemployment which rose in the Great Recession but has not returned to pre-recession levels even though the unemployment rate has.  Involuntary

part-time employment rose in every advanced country and remains elevated in many in 2018.

In the UK we construct the Bell/Blanchflower underemployment index based on reports of whether workers, including full-timers and those who want to be part-time, who say they want to increase or decrease their hours at the going wage rate.  If they want to change their hours they report by how many.  Prior to 2008 our underemployment rate was below the unemployment rate.  Over the

period 2001-2017 we find little change in the number of hours of workers who want fewer hours, but a big rise in the numbers wanting more hours.  Underemployment reduces wage pressure.

We also provide evidence that the UK Phillips Curve has flattened and conclude that the UK NAIRU has shifted down.  The underemployment rate likely would need to fall below 3%, compared to its current rate of 4.9% before wage growth is likely to reach pre-recession levels.  The UK is a long way from full-employment.

A gated version of the paper is available here.