The Wage Curve and the Phillips Curve

Blanchflower and Oswald (1994) have argued that, in regional data, the level of unemployment is related to the fevel of wages. This result is at variance with an application of the original Phillips curve to regional data, which would predict that the change in wages ought to be related to the unemployment rate. On the other hand, there is considerable empirical support for the expectations-augmented Phillips curve using macroeconomic data. I resolve this tension by showing that a standard macroeconomic expectations-augmented Phillips curve can be derived from microfoundations that begin with the wage curve. I am grateful to Kevin Hassett, David Lebow, and Andrew Oswald for helpful comments. The views expressed in this paper are those of the author and not necessarily those of the Board of Governors of the Federal Reserve System or other members of its staff. .. In their book The Wage Curve, Blanchflower and Oswald (1994) argue that wages are determined by a “wage curve” that relates an individual’s wage to the level of the unemployment rate in their region or industry. Blanchflower and Oswald also suggest that these rnicroeconomic results maybe inconsistent with a macroeconomic Phillips curve that relates the inflation rate to the level of the unemployment rate: Their macroeconomic evidence suggests that there is a relationship between the level of the wage and the unemployment rate, and not the change in the wage, as was posited by Phillips (1958). However, there is considerable empirical support for the expectationsaugmented Phillips curve in macroeconomic data. For example, King and Watson (1994) have recently taken a thorough look at the evidence, and found that the expectations-augmented Phillips curve is a robust feature of the U.S. macroeconomic data over the past several decades. As a consequence, there appears to be some tension between the individual wage curve and the macroeconomic results. But as I show below, this tension is more apparent than real: Once account is taken of plausible nominal rigidities, a standard-looking, expectations-augmented Phillips curve can be derived from microfoundations that begin with the wage curve for individuals. I also present empirical evidence that suggests that estimates of the slope of the wage curve that are taken from macroeconomic Phillips curves are close to the range of estimates that Blanchflower and Oswald obtain from macroeconomic data. These empirical suggest that the aggregate data may be reflecting the same phenomena that Blanchflower and Oswald are describing.