Job Turnover and the slope of the Phillips Curve
This paper relates the observed flatter Phillips Curve to the rise in labour turnover, as well as the weakening of collective bargaining. In a New Keynesian model of sticky wages, workers or unions discount future wage income with a low discount factor if there is a strong flow of job turnover. In the New Keynesian wage Phillips Curve, this implies that future inflation is discounted more heavily than without job turnover. A low coefficient for future inflation is consistent with empirical estimates such as Gali and Gertler (1999). A Phillips Curve that is less forward looking due to job turnover will appear to be flatter in the short run, because turnover creates a downward bias for the slope if it is not accounted for. In the long run, the Phillips Curve is much flatter, and is no longer vertical or near-vertical. The paper then derives the optimal monetary policy in such a setup. In particular, the price targeting result of the Ramsey policy is violated when there is turnover. In the presence of steady state distortions, the long run inflation target is not zero, and there is no full mean reversion of the price level after a cost-push disturbance.