Neo-classical labour market dynamics, chaos and the Phillips curve

The relationship between wage inflation and unemployment has been extensively investigated since the early work of Phillips (1958) and Lipsey (1960), and is still a matter of debate. In this paper we study the dynamics of a standard neoclassical labour market under Walrasian adjustment rules. We show that, when consumption and leisure are sufficiently low substitutes, the unique Walrasian equilibrium of the economy can be destabilised and regular or even chaotic fluctuations of wages and employment appear. This leads to an interesting resurrection of the Phillips curve as a long term phenomenon.