illips curve, the observed relationship between inflation and the unemployment rate, has long been a mainstay of market and policy analysis of inflation in the United States. Macroeconomic forecasters and policymakers alike have relied on the Phillips curve to provide a reading of the likely path for inflation in the period ahead. The unemployment rate has fallen in the 1990s, but the expected subsequent increase in inflation has not occurred. Some have attempted to explain this in terms of developments in the labor market, specifically, increased fears of job loss. However, measures of job insecurity do not help to explain why the Phillips curve has been less reliable than in the past. Other factors, such as the behavior of labor costs other than wages, fluctuations in the value of the US dollar, and other developments affecting the markup of prices over wages, more likely explain the unusually subdued behavior of inflation in the United States. Of course, many factors other than wages influence prices. The cost of intermediate inputs, such as energy, is one example. Also, firms set prices and workers bargain for wages based, in part, on the general level of prices they expect to prevail in the future. This has led some forecasters and policy analysts to add past inflation and prices of inputs such as oil to their Phillips curves. Some have argued that inflation has declined because of a decline in the natural rate of unemployment. If this were the case, at least some of the recent decrease in unemployment would be due to structural changes in the labor market and would not result in a tighter labor market. Simply reversing the Phillips curve to yield the rate implied by observed inflation and unemployment rates can test this argument; such a test implies that the long-run natural rate is about 3.75 percent. This is hard to believe; the actual US unemployment rate has not been that low since 1969 and the figure is well below statistica...
