Abstract
The recovery of 2013 that followed the United Kingdom's Great Recession featured a rapid fall in unemployment but stagnant wage growth. Did the wage Phillips curve break down? These dynamics have two main candidate explanations: declining labor frictions, meaning lower unemployment without increasing wage growth; or a demand recovery accompanied by weak productivity, meaning unemployment fell but equilibrium wage growth remained low. This paper investigates using an estimated New Keynesian model featuring unemployment. The data favor a mix of explanations, but with the balance of evidence favoring the second. A demand recovery reduced unemployment, but wages are likely to have remained weak mainly because of poor productivity.
Authors
- Benjamin D. Nelson
JEL codes
- E23
- E32