The suggestion that only the short-term unemployed matter for wage determination, that the long-term unemployed have been written off, is rapidly congealing into orthodoxy. And it might be true. But I’m with Mike Konczal here: it’s far from being a well-established fact. Mike argues that to the extent it was true at all, it was a temporary phenomenon, and that more recent data don’t support the claim. I’d make a different (although not necessarily conflicting) argument: a lot of the supposed evidence comes from applying Phillips curves estimated over periods of moderate to high inflation, and there are good reasons to believe that such estimates misbehave at low inflation.

If you look at the figures Mike extracts from Krueger et al (pdf), they show “accelerationist” Phillips curves: unemployment determines not the rate of change of prices or wages, but the change in the rate of change. The idea is that recent inflation gets built into expectations and hence establishes a new baseline for each year’s short-run tradeoff.

But we know that there is strong evidence for downward nominal wage rigidity, which is binding for many workers at low inflation; we are constantly told that these days inflation expectations are “anchored”; and we know from historical experience with prolonged large output gaps (PLOGs) that countries very rarely go into actual deflation. All of this suggests that using a wage or price equation estimated over the 70s and early 80s could be very misleading if applied to today’s environment.

In fact, I’ve pointed out in the past that if you restrict yourself to Great Moderation-era data, what you seem to find is an old-fashioned, non-accelerationist Phillips curve. Furthermore, recent experience is consistent with that curve. Here’s the rate of growth of nonsupervisory wages:

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I’d like to see someone do some more formal testing here, estimating Phillips curves on some rolling basis. My strong bet is that the coefficient on lagged inflation, which is forced to be 1 in the Krueger et al work, “wants” to be a lot less than 1 in recent decades.

My point is that we may well be mistaking the normal behavior of a low-inflation, depressed economy for a structural rise in the natural rate of unemployment.

PS: The Beveridge curve, widely taken as a sign of structural unemployment, seems to be normalizing.