Who Killed the Phillips Curve? A Murder Mystery

David Ratner and Jae Sim
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David Ratner: https://www.federalreserve.gov/econres/david-d-ratner.htm

No 2022-028, Finance and Economics Discussion Series from Board of Governors of the Federal Reserve System (U.S.)

Abstract: Is the Phillips curve dead? If so, who killed it? Conventional wisdom has it that the sound monetary policy since the 1980s not only conquered the Great Inflation, but also buried the Phillips curve itself. This paper provides an alternative explanation: labor market policies that have eroded worker bargaining power might have been the source of the demise of the Phillips curve. We develop what we call the "Kaleckian Phillips curve", the slope of which is determined by the bargaining power of trade unions. We show that a nearly 90 percent reduction in inflation volatility is possible even without any changes in monetary policy when the economy transitions from equal shares of power between workers and firms to a new balance in which firms dominate. In addition, we show that the decline of trade union power reduces the share of monopoly rents appropriated by workers, and thus helps explain the secular decline of labor share, and the rise of profit share. We provide time series and cross sectional evidence.

Keywords: Bargaining power; Profits; Inflation dynamics (search for similar items in EconPapers)
JEL-codes: E31 E32 E52 (search for similar items in EconPapers)
Pages: 36 p.
Date: 2022-05-20
New Economics Papers: this item is included in nep-his, nep-mac, nep-mon and nep-pke
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (10)

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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedgfe:2022-28

DOI: 10.17016/FEDS.2022.028

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