ABSTRACT
Since the 1980s it has become customary to formulate and estimate labor and goods market dynamics by a single reduced–form Phillips curve (PC), relating price inflation directly to excess demand on the market for labor. Yet, as Fair has stated recently this might be regrettable, since it – in his view – implies a considerable loss of predictive accuracy (see Fair 2000, p. 69). Phillips (1958) already had strongly emphasized that two markets are involved in the unemployment–inflation trade–off. He viewed the relationship between unemployment (demand pressure) and wage change as a non–linear one and stressed that product market prices (cost pressure) do effect the unemployment–wage relationship in certain time periods of his estimates. Although he did not estimate wage and price Phillips curves (WPC, PPC) separately he pointed out that those two are interacting. Fair (2000) then indeed employs and estimates two PCs, in fact for wage and price levels in the place of wage and price inflation rates, instead of only the conventional single price–inflation unemployment trade–off relationships. He finds that demand pressure (measured by the employment gap) matters in the market for goods, but not in the market for labor, where money wages are following the evolution of the price level more or less passively.
