The Phillips Curve and Cyclical Manhour Variation

Abstract

First paragraph: This paper attempts to show the importance of the work on cyclical manhour variation, pioneered by Oi (1962), Rosen (1968), Nadiri and Rosen (1969), (1974a) and (1974b)) and Ehrenberg (1971), towards understanding the observed short-run relationships between nominal wage changes and unemployment. The focal point for the inflation analysis is the Phillips curve derivation of Barro and Grossman (1976) and Grossman (1974) since their approach of denning excess demand in terms of manhours provides a crucial link between employment and inflation theories. While the general Barro and Grossman macroeconomic system (see also (1971)) represents an extreme case within the class of non-market clearing models, given its arbitrary fixed price assumption, its use here, apart from convenience, is defended for two reasons. First, the adoption of a more sophisticated non-market clearing model incorporating an explicit price adjustment equation would not alter the main arguments substantively. Secondly, although the applicability of the Barro and Grossman methodology was originally questioned, since it left unexplained why prices may fail to clear markets, more recent work on price adjustment has helped to give a firmer foundation to this approach (see Gordon (1981)).