Working Paper Series, Swedish Institute for Social Research, Stockholm University
"Wage Redistribution and the Long Run Phillips Curve"
Abstract: We derive a long-run Phillips curve that is negatively
sloped at low inflation rates. Due to exogenous changes, unions want to
redistribute wages across different members also in the long run. Wage
stickiness, inflation targeting and union solidarity are central
characteristics of our New Keynesian model. In the model, high enough
inflation becomes the grease of the economy that allows wage redistribution
across unions without causing unemployment to rise above NAIRU. We show
that under nominal wage rigidity, long-run unemployment may rise
drastically and at zero inflation, unemployment may be trapped at very high
levels even if demands for wage redistribution tapers off. Under real wage
rigidity, the economy may get trapped at high unemployment also at positive
but low inflation rates irrespective of demand for wage redistribution has
vanished or not. Thus, a period of wage redistribution may cause an economy
of full real wage rigidity to get trapped at a high unemployment rate. A
policy conclusion is that economies characterized by extensive wage
rigidity should not target inflation at too low levels.
Keywords: -; (follow links to similar papers)
28 pages, April 9, 2008
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