The paper reviews the most recent international literature on the Phillips curve, focusing on the debate around the ability of such a model to forecast inflation in recent years. Moreover, it offers some estimates of wage inflation for the euro area based on several specifications of the model.
Unlike what is documented by the literature, which mostly focuses on the US, the empirical evidence shows that there are no non-linear effects of labour market tightness on wage dynamics in the euro area. A version of the Phillips curve embedding multiple indicators of labour market slack and of excess labour demand (e.g. the ratio between vacancies and the number of unemployed), as well as their dynamics over time, performs well in predicting wage inflation in the period after the pandemic.
