The Wage Phillips Curve under Labor Market Power

Using the near universe of online vacancy postings in the United States, we explore linkages between labor market power and the trade-off between unemployment and wages. We estimate the Phillips curve at the commuting zone level and find that the relationship between unemployment and wage inflation is weak in regions with high labor market power. These results help explain the flattening of the wage Phillips curve following the global financial crisis. In the context of rising interest rates, unemployment is likely to rise more in poorer US regions because labor market power is more prevalent there, thus leading to rising inequality.