The Relation betweenUnemployment and theRateofChange ofMoney WageRatesintheUnited Kingdom,1862-1957:AFurtherAnalysis'
ByRIcHARDG.LiPSEYInanearlier paperinthis journal, Professor Phillips2 has advancedthe hypothesis that the percentagerate of change of money wage ratesin the United Kingdom (W) can be explained to a very large extentby: (i)thepercentageofthe labourforce unemployed (U), and (ii) therate of changeofunemployment (U).After an inspection of the data,Phillips concludednotonly thatthere isaclearly observable relation-shipbetweenthese variables, butthatthe form oftherelationshiphas been remarkably stable overa period of almost one hundredyears.ThepurposeofthepresentpaperistoreconsiderPhillips'work in some detail. In particular it seemed necessary: (i)toconsiderthegeneral theoreticalmodel that is being tested; (ii)toquantify Phillips' results, determining,if possible, the proportionofthe variance in money wage ratesthat is associated with thetwovariables, level of unemployment (U) and rate of change of unemploy-ment(U); (iii)toprovide systematic testsofthevarioussubsidiaryhypothesesframedby Phillipsduring the courseofhisanalysis;and(iv) to test hypotheses that followfrom possible alternative models.The logical order in which to dealwith these topics, in the absenceofPhillips' paper,wouldbe, first,tooutline the phenomenawhichrequire explanation, then to developa model which will explain thephenomena, and, finally,totestfurther implicationsofthemodel.GivenPhillips' paper, however, aslight changeofapproachseemstobedesirable.Inthe firstsectionof this paper a reportisgivenofthestatisticalanalysis carried outon data for the period1862-1913.Although themainpurpose is to discover what phenomena requireexplanation, aratherelaborate treatment is requiredinordertotestthe hypothesesaboutthese phenomenaframed by Phillips. Thisis
The presentpaper, ikeProfessorPhillips', s a part of awider researchprojectfinanced by the Ford Foundation.The writer was assistedby Mr. PeterLantosand Mrs. June Wickins.This paper was the subjectof extendeddiscussion at theLSE Staff Seminaron Methodologyand Testing in Economicsand I am indebtedto all the members or manycommentsand suggestions; Ialsobenefitedrom thediscussion at the Universityof ManchesterAdvanced EconomicsSeminar wheresome of the materialembodiedn this paper was first presented.Mr. F. BrechlingandDr.S.F.Kaliski have given valuablecriticismsand I am particularly ndebtedtoProfessorPhillips forhis constant aid andencouragement.
W. Phillips,"The Relation Between Unemployment ndthe Rate ofChangeof Money Wage Rates inthe United Kingdom, 1861-1957", Economica,Nov.