The Distribution of Excess Demand for Labor and the Phillips Curve

Abstract

It is rigorously demonstrated that a relation which has the main characteristics of the curve found by Phillips will exist, provided that the distribution of excess demand over submarkets is constant in a certain sense. The excess demand for labor in each submarket is divided into two components: the cyclical component common to all submarkets and the structural component specific to the sub-market in question. Relative excess demand in each submarket is the product of the cyclical and structural components minus one. Assuming for simplicity that the structural components are continuously distributed, the Phillips curve is then derived from the cumulative density function of this distribution. It is also shown that changes in the spread of this distribution will alter the position of the Phillips curve and the natural rate of unemployment. It is demonstrated that, unless checked by exogenous forces, endogenous market forces in each sub-market and mobility between submarkets will tend to move the Phillips curve inwards, whereas the Scandinavian type of trade unionism will counteract this tendency.

Useful comments and suggestions from Eirik Amundsen, Rögnvaldur Hannesson and Erling Vårdal of the University of Bergen, and Jostein Aarrestad, Ayse Balanliouglu, Thore Johnsen and Arne Dag Sti of the Norwegian School of Economics are gratefully acknowledged.