Testing Wage and Price Phillips Curves for the United States

This paper demonstrates, contrary to what has been shown recently, that demand pressure, besides cost-pressure, matters both in the labor market and the market for goods in the determination of wage and price inflation. We consider and estimate both wage and price Phillips-curves for the U.S., using OLS and nonparametric estimation techniques. The finding is that on the whole wages are more flexible than prices with respect to their respective demand pressure terms and that price inflation determination gives (somewhat) more weight to medium term inflation than does wage inflation. This implies, as reduced form equation, a real wage dynamic that depends positively on the real wage, and thus an adverse real wage adjustment, if aggregate demand depends positively on temporary real wage changes (which is likely to be the case, at least in states of high economic activity). Monetary policy thus is not only facing adverse real rate of interest adjustments (destabilizing Mundell-effects), but also destabilizing real wage adjustments (adverse real-wage effects). Such effects have rarely been discussed and estimated in the literature. In comparing linear and nonlinear estimates we find that for some relationships nonlinearities are important for others not. Although overall the nonlinear estimates tend to confirm our linear estimates nonlinearities in some relationships of the Phillips-curve are important as well. JEL CLASSIFICATION SYSTEM FOR JOURNAL ARTICLES: E24, E31, E32, J30.