Real wages, inflation and unemployment

BIS Working Papers No 9
July 1984

This paper summarises the main features of an expectations-augmented Phillips curve with accompanying mark-up price equations. The empirical counterparts for six countries are presented. Even though preliminary, the results are relatively satisfactory in terms of statistical fit and a priori expectations with respect to the sign and size of the parameters. However, in periods when both inflation and unemployment have increased far above historical trends, it is somewhat unsatisfactory to assume that the level of unemployment is exogenous and independent of the inflation process. Moreover, considering the simultaneous changes in relative prices and real wages, there would seem to be some merit in incorporating these variables – directly and indirectly – in the wage formation process.