Some considerations on the Phillips curve after the pandemic

Salvatore Lo Bello () and Eliana Viviano ()
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Salvatore Lo Bello: Bank of Italy
Eliana Viviano: Bank of Italy

No 842, Questioni di Economia e Finanza (Occasional Papers) from Bank of Italy, Economic Research and International Relations Area

Abstract: In the economic literature, the appropriateness of the Phillips curve as a potential tool for analysing the trade-off between price stability and unemployment (or the output gap) is often questioned. This paper briefly reviews the most recent contributions to the literature on the Phillips curve (especially after the pandemic) and offers some novel evidence for the euro area. In contrast with what was documented for the US economy, we find no clear evidence of a non-linear effect of labour market slack on wage inflation. However, we do find that a model including the dynamics of both the unemployment rate and labour market tightness, above and beyond their level, substantially helps predict wage inflation in the last years. This is consistent with a strand of the literature that claims that hysteresis in the labour market is important to explain wage growth. Using our preferred specification of the Phillips curve, we find that the historically high level of labour market tightness experienced in 2022-23 has not brought about significant wage pressures so far.

Keywords: wage inflation; unemployment; labor market tightness; economic slack (search for similar items in EconPapers)
JEL-codes: E31 J31 J63 J64 (search for similar items in EconPapers)
Date: 2024-04
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