Production Technologies and the Phillips Curve

In an economy with increasing returns to scale in production, wage changes and unemployment levels are shown to fluctuate systematically. Such fluctuations are part of the stable long-run configuration of the economy. They generate data sets in which wage changes show a negative Phillips-type correlation with the level of unemployment. This negative correlation is a reflection of the conventional Walrasian price adjustment process in the labor market, and does not imply that across equilibria there is a negative relation between wage changes and unemployment. In particular, it does not imply the existence of a trade-off between inflation and unemployment