I n t h I s c h a p t e r y o u w I l L

natural rate
of unemployment.
The vertical long-run Phillips curve illustrates the conclusion that
unemployment does not depend on money growth and inflation in the long run.
The vertical long-run Phillips curve is, in essence, one expression of the classi-
cal idea of monetary neutrality. As you may recall, we expressed this idea in Chap-
ter 31 with a vertical long-run aggregate-supply curve. Indeed, as Figure 33-4
illustrates, the vertical long-run Phillips curve and the vertical long-run aggregate-
supply curve are two sides of the same coin. In panel (a) of this figure, an increase
in the money supply shifts the aggregate-demand curve to the right from 
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1
financial economist at Keycorp, a Cleve-
land bank, “at a time when revenue
growth is constrained.”
But with unemployment already at a
low 5.5 percent and the economy looking
stronger than expected this summer,
more analysts are worried that it may be
only a matter of time before wage pres-
sures begin to build again as they did in
the late 1980s. . . .
The labor shortages are wide-
spread and include both skilled and
unskilled jobs. Among the hardest oc-
cupations to fill are computer analyst
and programmer, aerospace engineer,
construction trades worker, and various
types of salespeople. But even fast
food establishments in the St. Louis
area and elsewhere have resorted to
signing bonuses as well as premium pay
and more generous benefits to attract
applicants. . . .
So far, upward pressure on pay is
relatively modest, a phenomenon that
economists say is surprising in light of an
uninterrupted business expansion that is
now five and a half years old.
“We have less wage pressure
than, historically, anyone would have
guessed,” said Stuart G. Hoffman, chief
economist at PNC Bank in Pittsburgh.
But wages have already crept up
a bit and could accelerate even if the
economy slackens from its recent rapid
growth pace. And if the economy
maintains significant momentum, some
analysts say, all bets are off. If growth
continues another six months at above
2.5 percent or so, Mark Zandi, chief
economist for Regional Financial Associ-
ates, said, “we’ll be looking at wage infla-
tion right square in the eye.” . . .
[
Author’s note: In fact, wage inflation did
rise. The rate of increase in compensation
per hour paid by U.S. businesses rose
from 1.8 percent in 1994 to 4.4 percent in
1998. But thanks to a fall in world com-
modity prices and a surge in productivity
growth, higher wage inflation didn’t trans-
late into higher price inflation. A case
study later in this chapter considers these
events in more detail.]
One worker who has taken advan-
tage of the current environment is Clyde
Long, a thirty-year-old who switched jobs
to join Trinity Packaging in May. He had
been working about two miles away at
Ross Industries, which makes food-
processing equipment, and quit without
having anything else lined up.
In a week, Mr. Long had hired on at
Trinity where, as a press operator, he now
earns $8.55 an hour—$1.25 more than at
his old job—with better benefits and train-
ing as well. “It’s a whole lot better here,”
he said.
S
OURCE
:
The New York Times,
September 5, 1996,
p. D1.

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PA R T T W E LV E
S H O R T - R U N E C O N O M I C F L U C T U AT I O N S
to
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2
. As a result of this shift, the long-run equilibrium moves from point A to
point B. The price level rises from