Did globalization flatten the Phillips curve? US consumer price inflation at the sectoral level

It is well-known that the slope of the U.S. Phillips curve has flattened in recent decades. In this article we examine the Phillips curve at the sectoral level to better understand why the slope has flattened. We decompose the core personal consumption expenditures (PCE) deflator into its sectoral parts and find, using a standard new Keynesian Phillips curve econometric specification, that the goods and services sectors contributed unequally to the change in slope. Our analysis is novel in its consideration of PCE inflation dynamics at a microsectoral level within the goods and services categories. The hypothesis that we think accounts for our findings is that globalization and the shift in U.S. output away from manufacturing production toward services reduced the impact of U.S. labor market conditions on the determination of goods prices and likely created a glut of workers seeking employment in the low-wage domestic service sector. The latter implies that workers in the service sector have a de minimis ability to bargain for higher wages, which ultimately manifests itself as a flat Phillips curve slope in the aggregate data. Our results suggest that the full-employment level of unemployment in the U.S. labor market is likely much lower than commonly estimated. Consequently, we argue that aggregate-demand-management policy in the postglobalization era has been persistently biased by an artificial perception of scarcity in the labor market. This bias has restrained wage growth for those working in the domestic service sector, ultimately resulting in widening earnings inequality.