For example, Canada did not have a wage adjustment during the first historical period, but it experienced one during the second period. We refer to the latter as the second episode of wage adjustment in Canada. Peak years are country-specific; hence they are not the same in all countries. This means that the first wage adjustment episode, including the peak years, may have lasted, for example, 7 years in Italy, 8 years in Germany and France, 9 years in US, 20 years in Korea or 28 years (and counting) in Japan. Of the 35 countries analysed, 21 countries experienced the first historical episode of wage adjustments, 33 countries experienced the second historical episode of wage adjustments and only 2 countries experienced the third historical episode of wage adjustments. This is why the total number of observations is much higher for the second wage adjustment episode, compared against the first wage adjustment episode. In the case of the third wage adjustment episode, the total number of observations is much lower. And now we move to the juicy part. We present the graphical representation of our results for all OECD countries which experienced wage adjustments (21 countries for the first wage adjustment episode and 33 countries for the second wage adjustment episode). The results are statistically significant and with the expected sign for the first two adjustment episodes. For the third adjustment episode, the sign of the relationship is as predicted, but the number of observations is too limited to have statistical significance.
True, any non-observable variable becomes visible at some point in the form of a disequilibrium in other observable variables, among which the twin deficits (budget deficit and current account deficit). Yet, when this happens, it is usually too late for monetary policy. Therefore, we drop the non-observable variables such as output gap, inflationary expectations and NAIRU – at least when the task at stake is to explain inflation in a post-crisis environment. Instead, we choose to use observable variables only. Since wage is a measurable, reliable, accounted for, and comparable indicator, we focus on a wage Phillips Curve where consumer prices inflation rate is explained by the difference between past wages and current wages. Second, we should make a fundamental change of paradigm from flow to stock. To understand the consumers behavior, which in turn influences inflation, we introduce the concept of a cumulative wage gap – meaning the cumulative gap between current wage and a peak reference wage value in the past. The permanent income hypothesis is fundamentally flawed in times of crisis, because of uncertainty of future income. The only certain reference value lies in the past, not in the future: and that is why current consumption is influenced by past income. Third, we should allow for the Phillips Curve to be non-stationary: it moves over time, and it is absolutely normal to do so.