What Type of Contracts Underlie Aggregate Wage Dynamics? (Electronic book text)

Two decades after the rational expectations revolution, the Phillips curve continues to be a main pillar of applied research. Macroeconometric models, comparative studies of the macroeconomic performance of different countries, evaluations of the cost of disinflation, and other related applications, regularly make use of regressions of aggregate wage changes on lagged inflation, unemployment, and some other variables.1 Although now the techniques are more sophisticated, and analysts are more careful at interpreting the results they obtain, the basic approach used to model aggregate wage behavior has not changed significantly. The persistence of the Phillips curve, however, should not be taken as a measure of empirical success: it is well known that the estimated equations have been quite unstable across time and countries.