A. W. Phillips’ 1958 paper examined unemployment and wage growth. What

A. W. Phillips’ 1958 paper examined unemployment and wage growth. What role, if any, does wage growth play in the modern Phillips curve?

What will be an ideal response?

ANSWER

The modern Phillips curve relates unemployment to inflation, rather than wages. This allows inclusion of expected inflation and price shocks as causes of inflation, in addition to the unemployment gap. But the central idea remains that changes in inflation are driven by wage changes. When wages are sticky, then unemployment gaps have a small impact on inflation, while flexible wages cause large changes in inflation.