The Dynamics of Income Shares and the Wage Curve-Phillips Curve Controversy

This paper argues that the Phillips curve-wage curve controversy cannot be settled within the conventional testing frameworks and suggests an alternative test, which builds on the model of Blanchard and Katz (1997). Using long macro data for the OECD countries, the evidence gives very strong support for the Phillips curve and indicates that wage behaviour is no different among the OECD countries. This implies that adverse supply shocks, which push wages in excess of the full employment equilibrium, have only temporary effects on real product wages and therefore cannot explain the persistently high unemployment in most European countries.