State-level wage Phillips curves

Two reduced-form versions of New Keynesian wage Phillips curves based on either
sticky nominal wages or real-wage rigidity using monthly US state-level data for the
period 1982-2016 are examined, taking account of the endogeneity of unemployment by
instrumentation and the use of common correlated effects (CCE) and mean group (MG)
methods. This is the first time that this methodology has been applied in this context.
These are important issues, as ignoring them may lead to substantial biases. The results
show that while the aggregate data do not provide estimates that are consistent with
either of the theoretical models examined, the panel methods do. Moreover, use of an
appropriate MG CCE estimator leads to economically significant changes in parameters
(primarily a steeper Phillips curve) relative to those from inappropriate but widely used
panel methods, and in the real-wage rigidity case is required to deliver results that have
a theoretically admissible interpretation.