Is the Phillips Curve Still a Curve? Evidence from the Australian Regions

The way in which wages respond to very low rates of unemployment remains a key source of uncertainty in Australia, partly due to the lack of historical evidence to draw upon. To help fill this gap, we study data on unemployment rates and wages growth across local labour markets over the past 20 years. The considerable variation in economic conditions across local labour markets allows us to infer the strength of the relationship between unemployment and wages growth (i.e. the wage Phillips curve) at very low unemployment rates that are rarely seen at the national level.

We find strong evidence that the wage Phillips curve is indeed a curve, rather than a straight line. When the unemployment rate exceeds 7½ per cent, the Phillips curve is flat and wages growth is unresponsive to changes in unemployment. Wages growth then becomes increasingly responsive to changes in the unemployment rate as the unemployment rate falls to lower and lower levels, most notably below 4 per cent.

These findings have important implications for policy.
According to the RBA Board (RBA 2021a), the cash rate will not be raised until inflation is sustainably within the 2 to 3 per cent target range. The relationship between unemployment, wages growth and inflation is important for understanding how inflation will evolve. While endogenous policy makes it difficult to extrapolate from regional evidence to draw conclusions about outcomes at the aggregate level, our paper provides evidence as to the underlying relationship between unemployment and wages growth. This relationship is a key component of the broader equilibrium between unemployment, wages growth and inflation, and understanding it is crucial given the RBA’s policy objectives.
Couple of years ago, RBI also did a study on Philips Curve for Indian States:

This paper revisits the issue of determinants of inflation in India in a Phillips curve framework and makes two key contributions in relation to existing studies. First, in the context of the Reserve Bank moving towards a flexible inflation targeting framework based on consumer price index (CPI) inflation, this paper attempts to model dynamics of the CPI inflation. Second, this paper explores the Phillips curve relationship using sub-national data in a panel-approach. The estimates in this paper confirm the presence of a conventional Phillips curve specification, both for core inflation and headline inflation. Excess demand conditions have the expected hardening effect on inflation, with the impact being more on core inflation. Exchange rate movements are also found to have a significant impact on inflation. Overall, the paper’s findings provide support for the role of a counter-cyclical monetary policy to stabilise inflation and inflation expectations.

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