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Controlling for Geographic Dispersion When Estimating the Japanese Phillips Curve

This paper argues that estimation of the Phillips curve for Japan should take account of the geographic dispersion of labor-market conditions. We find evidence that the relationship between wage inflation and the unemployment rate is convex. With such convexity, wage inflation can occur when unemployment rates across regions become more disperse, even if the aggregate unemployment rate is unchanged. We show that controlling for the geographic dispersion of unemployment rates yields a flatter Phillips curve and a higher natural rate of unemployment.

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