In this thesis, I examine the behavior of inflation and unemployment in the United States, the United Kingdom and Norway, and test to what extent we can explain inflation and unemployment dynamics using models that allow real wage growth to diverge from laborproductivity growth.
Chapter 1 presents the characteristics of the "New Economy" period. A simple Phillips curve model is included for illustrative purposes. Possible explanations for the macroeconomic behavior of the U.S. are pointed out, and some historical data on labor productivity growth rates is presented.
In Chapter 2, the price-wage spiral, an important part of price-wage dynamics, is presented and explained.
In Chapter 3, the core model of this thesis - the productivity-augmented Phillips curve - is derived. Wage aspirations are explained and incorporated into the wage setting process. The neoclassical factor rewardance results are demonstrated, and placed in connection with the productivity-augmented Phillips curve, ultimately relating these results to infation. A section on the natural rate of unemployment is included, and the connection between the NAIRU and the productivity-augmented Phillips curve is discussed. I also look at the effects of productivity growth on the Phillips relationship, and further, how productivity might affect the price-wage spiral. Finally, the more general Phillips relation of the 'Triangle' model is discussed.
Chapter 4 is the main investigative part of my thesis. I estimate several Phillips curve type models using Ordinary Least Squares regression, examining the relevance of the productivity-augmented Phillips curve. Data for the U.S., U.K. and Norway is analyzed.Evidence is found suggesting that the gap between labor productivity growth and wage aspirations growth (which affects actual wage growth) has a negative and statistically signifcant effect on the change in inflation rates over time. The explanatory power of this gap is found to be stronger for the U.S. and the U.K. than for Norway. I also compare some of my main findings for the U.S. to those in Ball and Moffitt (2001).
Chapter 5 concludes.