Mitchell’s Musings 5-4-15: Phillips is Back Daniel J.B. Mitchell Back in the day, economists used to debate about the “Phillips Curve,” essentially a prediction that nominal wages would rise more quickly as the unemployment rate fell. There were debates, starting in the late 1960s, over the stability of the relationship and about its lack of theoretical underpinnings. But in some form or other, early empirical forecasting models contained a version of the relationship. It was one of those things that, to paraphrase former Fed chair Ben Bernanke in another context, worked in practice even if not in theory. Today’s forecasters still have some kind of Phillips curve – perhaps much embellished – in their modeling apparatus. In the years after the Great Recession, however, there developed doubt as to whether we would see a rise in nominal wage growth despite the fall in the unemployment rate. It was noted that other elements of labor market activity measurement, notably the participation rate, seemed to suggest that there was a good deal of hidden or discouraged unemployment. From that perspective, the official unemployment rate was misleadingly low. Even though the official rate had fallen below 6% during 2014, perhaps the labor market wasn’t as tight as that number would suggest. --Official Unemployment Rate, Seasonally Adjusted
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