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BPEA Article

Changing Labor Markets and Inflation


WHAT RATES OF INFLATION will accompany various unemployment
rates? This question is the central concern of stabilization policy today and
also a major source of uncertainty for economic forecasting. Whether the
approach was made through informed judgment or rigorous research, investigators
have sought the answer to this question in the historic relation
between unemployment rates, on the one hand, and rates of wage increase
on the other, with wage increases then used to explain inflation. With many
variations and refinements, this concept of a trade-off between wage
changes and the aggregate unemployment rate has been the framework for
most discussions of inflation during the past decade.



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