The submarket Phillipscurves
Here, for simplicity, we take the wage level w instead of wage inflation. The rates of change can be found by comparing to w[-1].
Wage w, a continuous vector for each market, depends upon the power position of employers and employees, which is determined, amongst others, by the relative situation of unemployment versus vacancies. Since unemployment and vacancies have been expressed above as functions of w we solve w as a fixed point. We also add the equilibrating w* (or expectations E[w]) that are a function of product y, the tax burden for forward shifting, the labour cost quote, macro variables and the history of the variables. The submarkets Phillipscurves can include influences of other submarkets and general developments pertaining to all markets. A macro-economic hypothesis is that the development within markets is not merely influenced but even dominated by general events. The relationships are clearly dynamic, and we thus read all variables as time dependent.
w[y, T, Macro] = w[ w*[y], ud[w], vd[w], T[w] / w, w / y, Macro, History ]
Note that modern large models depend upon convergence techniques, and that the computation of fixed points can be included into convergence in general (though it would be computationally burdensome).
Shifting back
The stylized facts can be summarized as: [93]
· In the 1950-1970 period, welfare states generally had a high tax exemption level and full employment.
· In the 1970-2005 period welfare states generally had a low tax exemption level. To ensure a decent stardard of living, required gross income then rose and exceeded productivity in the low end of the market, generating unemployment, while shifting the Phillips curve and reducing its sensitivity.
· Even when the statutory tax system has a low exemption level, then subsidies for the lowly productive keep them in work. And subsidies can be at the firm or state level. This is crucial for the Japanese and Swedish experiences, see e.g. Aoki (1990) and Standing (1990). Note that, in a reduced form, subsidies turn up as ‘system-wide exemption’. A subsidy is no ‘real’ subsidy if it compensates for wrong taxes.