Generations of economics students have been inculcated with the Phillips Curve trade-off between increased inflation and lower unemployment. It makes sense that attracting and retaining employees when unemployed workers are harder to find puts upward pressure on wages, which transmits itself into higher prices throughout the economy. That common sense relationship seems to have broken down, however, during the past few decades. The questions arise: Is the Phillips Curve no longer valid? Was it ever? I believe the theory behind it remains valid, but that it's practical effect has attenuated due to two primary determinants: (1) the rapid increase of globalization, most obviously in manufacturing but also in services as well, which obtained during the past 25 years, and (2) the increased pace in the adoption of labor-saving technology by American employers, which makes them less sensitive to changes in the supply of labor. The offshoring of labor requirements makes employers less dependent on domestic labor, so that labor shortages in the U.S. can readily be dealt with by moving manufacturing operations overseas, or by contracting with service providers located in foreign countries. The increased ease by which automation can replace workers (think of fast food restaurants which have replaced much of their staff with kiosks, etc, in response to minimum wage increases) decreases the upward pressure on total labor costs. The underlying relationship remains, but its importance to the economy has abated.
Published by: Skip Cooper
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