Has the U.S. wage Phillips curve flattened? A semi-structural exploration

Abstract

The deep and prolonged recession triggered by the global financial crisis of 2007–2009 led to a large increase in the unemployment rate in most advanced economies. Ten years later, at the time of writing this paper, the recession has long ended, and the subsequent recoveries have brought the unemployment rate to levels close to, and in some cases even below, those at the peak of the previous expansion. In the U.S., the unemployment rate increased from 4.4 percent in May 2007 to 10 percent in November 2009. Since that peak was attained, the unemployment rate has decreased, albeit at a slower pace than in earlier recoveries, down to its current level below 4 percent. Both movements represent, respectively, the largest increase and the largest decrease in the unemployment rate experienced by the U.S. economy during the postwar period. Despite those wide and persistent fluctuations in unemployment, inflation has remained surprisingly stable during the same period. The previous phenomenon, often referred to in the literature as the “twin puzzle", appears to be robust to the measure of inflation and economic slack used, and has also been observed in other advanced economies...