Did Globalization Flatten the Phillips Curve?

Joe Seydl

September 2016

A dramatic flattening in the slope of the Phillips curve occurred after 1994

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Post-1994 is also when we saw a decoupling of goods inflation from services inflation

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There is no evidence that goods prices in the US are even

related to domestic labor slack anymore

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Using:

Goods prices are more related to import prices; we think because of the unprecedented

outsourcing of US manufacturing to China in recent decades

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So is the Phillips curve broken? Well, no: there’s still a relation between labor slack and

services inflation

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But the Phillips curve slope for services appears to have flattened considerably

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We buy into the Autor et. al. view that outsourcing to China created a glut of displaced workers

seeking employment in low-wage domestic service sectors. We think this is what flattened the services

Phillips curve slope.

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“a negative shock to local manufacturing reduces the demand for local non-traded services while increasing the available supply of workers, creating downward pressure on wages”

Our view has important implications for Fed policy, as with the unemployment rate

approaching conventional NAIRU estimates, some are arguing for tighter monetary policy

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Fortunately, the Fed is starting to get it: the FOMC has been revising down it’s estimate

of the NAIRU and is showing a preference for being behind the wage inflation curve

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This is good. The last time the Fed fell behind the wage inflation curve (late-1990s), those

at the bottom saw real wage gains on par with those at the top.

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Appendix Charts

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