The Phillips curve is alive and well

BRAZIL ECONOMICS - Report 11 Aug 2025 by Alexandre Schwartsman, Cristina Pinotti and Diego Brandao

With the renewed decline in the unemployment rate, labor earnings, which are already growing significantly above productivity, are expected to face new pressures.

Our estimates, based on pre-pandemic data, indicate that a 1 percentage point change in the economy’s slack, whether through an increase in the output gap or a decrease in the unemployment rate, is associated with approximately a 0.4 p.p. increase in annual wage growth. If unemployment continues to fall, we expect the effects of rapid wage growth on production costs and consumption to intensify, with consequences for inflation.

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