DP23 | Rational Expectations and Labour Market Equilibrium in Britain 1855-1913

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01/07/1984

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Abstract

This paper tests a two equation model of supply and demand for labour for 1857-1913, the period which was the focus of the original Phillips curve study. The basic structure is an equilibrium model of the labour market with "classical" characteristics arising from a surprise supply function and the assumption that expectations are formed rationally i. e. in a way consistent with the model itself. Tests of exclusion restrictions on a general reduced form tend to weakly reject these joint hypotheses. Tests on a structural model reject unanticipated wage change in a favour of actual wage change as the appropriate variable in the supply function. This gives support to the original Phillips curve formulation.