Neoclassical labour market dynamics, chaos and the real wage Phillips curve

The relationship between wage inflation and unemployment has been extensively investigated since the early work of Phillips [Phillips, A.W., 1958. The relation between unemployment and the rate of change of money wage rates in the U.K. 1861-1957. Economica 25, 283-299] and Lipsey [Lipsey, R.G., 1960. The relation between unemployment and the rate of change of money wage rates in the U.K. 1861-1957: a further analysis. Economica 27, 1-31], and it is still a matter of debate. In this paper we study the dynamics of a standard neoclassical labour market under the simplest Walrasian adjustment rule. We show that when consumption and leisure are sufficiently low substitutes, the unique Walrasian equilibrium of the economy can be destabilised, and regular or even chaotic fluctuations of wages and employment appear. This leads to an interesting resurrection of a real wage Phillips curve as a long-term phenomenon. (c) 2006 Elsevier B.V. All rights reserved.