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Dual Labor Market and the "Phillips Curve Puzzle"

Hideaki Aoyama, Corrado Di Guilmi (), Yoshi Fujiwara and Hiroshi Yoshikawa

Discussion papers from Research Institute of Economy, Trade and Industry (RIETI)

Abstract: Low inflation was once a welcome to both policy makers and the public. However, Japan's experience during the 1990's changed the consensus view on price held by economists and central banks around the world. Facing deflation and the zero-interest-rate bound at the same time, BOJ had difficulty in conducting effective monetary policy. It unusually prolonged Japan's stagnation. The excessively low inflation which annoys central banks today is translated into the "Phillips curve puzzle." In the US and Japan, in the course of recovery from the Great Recession after the 2008 global financial crisis, the unemployment rate had steadily declined to the level which was commonly regarded as lower than the natural rate or NAIRU; and yet, inflation stayed low. In this paper, we consider a minimal model of labor market. The essential assumption is that the labor market is dual. In this model, we explore what kinds of changes in the economy flatten the Phillips curve. The level of bargaining power of workers, the elasticity of the supply of labor to wages in the secondary market and the composition of the workforce are the main factors in explaining the flattening of the Phillips curve. We argue that the changes we consider in the model, in fact, have plausibly flattened the Phillips curve in recent years.

Pages: 20 pages
Date: 2021-01
New Economics Papers: this item is included in nep-cwa and nep-mac
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Working Paper: Dual Labor Market and the "Phillips Curve Puzzle" (2021) Downloads
Working Paper: Dual labor market and the "Phillips curve puzzle" (2021) Downloads
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