Testing the Participation Gap Inclusion within the Wage Phillips Curve

The Phillips curve alternative formulations have been widely studied, over the last years. Our research analyzes the Phillips curve in the framework of the MeMo-It model, used by Istat to provide forecasts for the Italian economy. In particular, we study an alternative specification including a measure of the labor market slack, i.e. the participation gap. This variable is computed as the difference between trend and actual labor force. The obtained specification of the Phillips curve allows analyzing how an improvement in the participation gap can lead to positive effects on wage growth. Our findings about the new formulation report a slight increase in the goodness of fit and an enhanced forecasting performance, in terms of prediction accuracy.