Market Power as an Intervening Mechanism in Phillips Curve Analysis

Abstract

Study of the relationship between the rate of change of money wages and the level of unemployment has emphasized the essentially dynamic character of the wage and price structure. That higher positive rates of change of money wages are associated with lower levels of unemployment is not merely an interesting empirical observation; it carries with it important policy implications, especially in a world in which full employment is claimed as the honourable pursuit of all governments. But what is the process by which a given economic state of affairs (as described by the unemployment rate) generates the observed fluctuations in wages ? What patterns of social and economic behaviour provide the motive force for the phenomena observed in the Phillips curve ? If the level of unemployment is considered solely as a general economic indicator that reveals the level of actual relative to potential economic activity, an intervening variable or mechanism must be introduced into the analysis. The intervening mechanism will be an operational construct that will permit a more complete sequential analysis of the process described by the Phillips curve.'

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