RDP 2021-09: Is the Phillips Curve Still a Curve? Evidence from the Regions Appendix A: RBA Aggregate Wage Phillips Curve Specification, Coefficients and Implied Slope

James Bishop and Emma Greenland

September 2021

The current RBA wage Phillips curve forecasting model is specified as[46]:

%ΔWP I t =α+β%ΔWP I t−1 +γ( u t−1 − u t−1 * u t−1 )+τΔ u t−1 +φ % Δ ye DFDde f t 4 +θ Tren d t−1 4 + ∈ t

where:

%ΔWP I t Quarterly growth in the wage price index (WPI) (hourly rates excluding bonuses); seasonally adjusted.
ut Quarter-average unemployment rate; seasonally adjusted.
u t * Non-accelerating inflation rate of unemployment (NAIRU; described in Cusbert (2017)); two-sided smoothed quarterly estimate.
Δ u t Quarterly change in the unemployment rate; seasonally adjusted.
%Δ ye DFDde f t Year-ended growth in the domestic final demand implicit price deflator.
Trendt Trend inflation expectations estimated using a Kalman filter (described in Cusbert 2017); two-sided smoothed quarterly estimate.
Table A1: RBA Wage Phillips Curve Model – Estimated Coefficients
Estimated on March 1998 – December 2019
  Dependent variable = WPI excluding bonuses
Constant −0.240
(0.243)
%ΔWP I t−1 0.354***
(0.103)
( u t−1 − u t−1 * u t−1 ) −0.476***
(0.122)(a)
Δ u t−1 −0.151**
(0.061)
%Δ ye DFDde f t 4 0.097
(0.074)
Tren d t−1 4 1.070***
(0.404)(a)
Adjusted R2 0.73
Notes: Standard errors in parentheses; ***, **, and * denote statistical significance at the 1, 5, and 10 per cent levels, respectively
(a) The standard errors on these variables do not account for the generated regressor problem

Sources: ABS; Authors' calculations

Figure A1: Implied Slope of the Wage Phillips Curve – Varying NAIRU
Estimated response of wages growth to a 1 percentage point increase in the unemployment rate
Figure A1: Implied Slope of the Wage Phillips Curve – Varying NAIRU

Notes: Short run; as implied by the RBA's wage Phillips curve model; uses time-varying two-sided NAIRU estimate

Sources: ABS; Authors' calculations

Figure A2: RBA NAIRU Estimate
Per cent of labour force, as at December 2019, quarterly
Figure A2: RBA NAIRU Estimate

Notes: Two-sided smoothed estimates; shaded areas represent one and two standard error bands around central estimates

Sources: ABS; RBA

Footnote

Although the nonlinearity imposed by the RBA's wage Phillips curve model has not changed since Debelle and Vickery (1997), the model is periodically assessed and adjusted as part of the internal RBA forecast review process. Here we present the current model specification. [46]