Money. age Dynamics and Labor-Market equilibrum Edmund s. Phelps University of pennsylvania If the economy were always in macroeconomic equilibrium then perhaps the full-employment money-and- growth models of recent vintage would suffice to explain the time paths of the money wage and the price level. But since any actual economy is almost continuously out of equilibrium we need also to study wage and price dynamics under arbitrary conditions The numerous Phillips-curve studies of the past ten year with a vengeance in offering countless independent variables in numerous combinations to explain wage movements. But it is difficult to choose among these econometric models, and rarely is there a clear rationale for the model used. This paper presents a modest start toward a unified and empirically applicable theory of money-wage dynamics. At the same time it tries to capture the role of expectations and thus to work into the theory the notion of labor-market equilibrium I. Evolution of the Phillips Curve and its Opposition Keynes,General Theory(1936) and virtually all formal macroeconomic models of the postwar era postulated a minimum unemployment level-a full-employment level of unemployment--which could be maintained with either stable prices or rising prices. In this happy state, additional aggregate demand would produce rising prices and wages but no reduction of un- employment. The full-employment quantity of unemployment was identi- fied as"“ frictional”and“ voluntary”; and frictional (mistakenly) assumed to be unresponsive to demand Hence there was need to choose between low unemployment and price stability This study was supported by a grant from the National Science Foundation I A monetary economy can choose among different levels of frictional unemploy. ment that correspond to different levels of aggregate demand and job vacancies. In fact, therefore, there is no unique full-employment quantity of frictional unemployMoney-Wage Dynamics and Labor-Market Equilibrum* Edmund S. Phelps University of Pennsylvania If the economy were always in macroeconomic equilibrium then perhaps the full-employment money-and-growth models of recent vintage would suffice to explain the time paths of the money wage and the price level. But since any actual economy is almost continuously out of equilibrium we need also to study wage and price dynamics under arbitrary conditions. The numerous Phillips-curve studies of the past ten years have done this with a vengeance in offering countless independent variables in numerous combinations to explain wage movements. But it is difficult to choose among these econometric models, and rarely is there a clear rationale for the model used. This paper presents a modest start toward a unified and empirically applicable theory of money-wage dynamics. At the same time it tries to capture the role of expectations and thus to work into the theory the notion of labor-market equilibrium. I. Evolution of the Phillips Curve and its Opposition Keynes' General Theory (1936) and virtually all formal macroeconomic models of the postwar era postulated a minimum unemployment level-a full-employment level of unemployment-which could be maintained with either stable prices or rising prices. In this happy state, additional aggregate demand would produce rising prices and wages but no reduction of un￾employment. The full-employment quantity of unemployment was identi￾fied as "frictional " and "voluntary "; and frictional unemployment was (mistakenly) assumed to be unresponsive to demand.l Hence there was no need to choose between low unemployment and price stability. * This study was supported by a grant from the National Science Foundation. A monetary economy can choose among different levels of frictional unemploy￾ment that correspond to different levels of aggregate demand and job vacancies. In fact, therefore, there is no unique full-employment quantity of frictional unemploy￾ment