What are the Characteristics of Japan's Aggregate Wage Dynamics?: An Empirical Study on the New Keynesian Wage Phillips Curve for Japan and the US

We present an empirical analysis on the New Keynesian Wage Phillips Curve (NKWPC) as derived by Gali (2011) using data for Japan and the US. NKWPC provides some theoretical insights on the relationship between wage inflation and the unemployment rate. We find that the empirical performance of Japan's NKWPC is generally superior, and that the slope of Japan's NKWPC is still much steeper than that of the US, although it has flattened in recent years. These results suggest that wages are less sticky in Japan. Taking into account the impact of price inflation on wage dynamics, we find that inflation indexation plays a key role in the US, but is less important in Japan. Analysis of recent data indicates that in both countries the role of inflation indexation is smaller than before. This result might be influenced by low and stable inflation over the past few decades.