An empirical study on the New Keynesian wage Phillips curve: Japan and the US

We compare aggregate wage dynamics in Japan and the US from 1970 to 2013 from the perspective of the New Keynesian wage Phillips curve (NKWPC), derived by [Galí, Jordi. 2011a. “The Return of the Wage Phillips Curve.” 9 (3): 436–461.]. We consider time variations in NKWPC’s parameters and make comparisons with micro-based evidence. Our main findings are three-fold. First, although Japan’s NKWPC has flattened over time, the slope of the NKWPC is much steeper in Japan than in the US. This suggests that nominal wage changes are less frequent in the US than in Japan. Second, inflation indexation, more prevalent in Japan in earlier periods, has recently become more important in the US although its role has declined over time in both countries. Third, our macro-level empirical results on the NKWPC are generally in line with micro-based evidence in each country, which suggests that the NKWPC provides a reasonable platform for modeling aggregate wage dynamics.