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BPEA Article

The Changing Cyclical Responsiveness of Wage Inflation

Abstract

A POPULAR THEME in discussions of stabilization policy is that inflation
-wage inflation, in particular-is becoming less responsive to changes
in unemployment and to the forces of aggregate demand in general. The
view is that wages today respond only slightly to unemployment and vary
more closely with prices, which in turn depend most on cost variables.
Since the cost variables are essentially prices (and wages are the most
significant single price), the system reduces to a highly autoregressive
model, with unemployment or demand seemingly playing a minor and
shrinking role.

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