Long-term unemployment and convexity in the Phillips curve

Bradley Speigner ()

No 519, Bank of England working papers from Bank of England

Abstract: The notion that the long-term unemployed are relatively detached from the labour market and therefore exert only little downward pressure on wage inflation has regained significant traction recently. This paper investigates whether the conclusion that long-term unemployment is only weakly related to inflation depends on the assumption of linearity in the Phillips curve. Specifically, once convexity is allowed for during the estimation process, long-term unemployment appears to have a significant negative influence on wage inflation, whereas in a linear Phillips curve model it is only the short-term unemployment rate that matters for wage dynamics. The intuition is simple; by the time the long-term unemployment rate rises during a recession, the economy may have already transitioned into a relatively flat region of the Phillips curve, generating the misperception that the marginal effect of long-term unemployment on wage inflation is smaller than that of short-term unemployment. Linear models which do not capture state dependence in the slope of the Phillips curve would therefore bias downwards the estimated importance of long-term unemployment in explaining wage dynamics if the true Phillips curve is convex.

Keywords: Phillips curve; convexity; natural rate of unemployment; Kalman filter; long-term unemployment; hysteresis (search for similar items in EconPapers)
JEL-codes: C22 E24 E32 J64 (search for similar items in EconPapers)
Pages: 25 pages
Date: 2014-12-19
New Economics Papers: this item is included in nep-lab and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (8)

Downloads: (external link)
https://www.bankofengland.co.uk/-/media/boe/files/ ... e-phillips-curve.pdf Full text (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:boe:boeewp:0519

Access Statistics for this paper

More papers in Bank of England working papers from Bank of England Bank of England, Threadneedle Street, London, EC2R 8AH. Contact information at EDIRC.
Bibliographic data for series maintained by Digital Media Team ().