Economics Professor David Blanchflower and former Dartmouth Economics Professor Andrew Oswald of the London School of Economics have reversed generations of economic theory by asserting that wages and unemployment are negatively correlated.
The discovery, presented in their new book, "The Wage Curve," to be published this winter, may have profound implications on government economic policy worldwide and force most economic textbooks to be rewritten.
The book concludes that, contrary to traditional understanding, wages and unemployment are negatively correlated -- that is, where wages are high, unemployment is low and vice versa.
"It essentially shows a number of things which run contrary to much of the think in economics," Blanchflower said. "The Phillips Curve is wrong, it's as fundamental as that," he said. "This has big implications for macroeconomics."
London's Guardian Weekly described the conclusion as "one of the most devastating findings in contemporary economics."
Oswald said in a news release, "The curve that we have found would not have been predicted by the current generations of economics textbooks. But it is exactly that predicted by a new and still controversial branch of macroeconomics. That theory has not reached the textbooks yet, but when it does, those texts will have to be rewritten."
Blanchflower and Oswald's conclusion follows from an eight year study of almost 4 million people in 16 countries. Data was collected from various sources, including government records and previous studies.
"It has taken us eight years. It started out with a set of relationships we did in the [United Kingdom] that looked very different from what we thought," Blanchflower said. "The more we did it the more we came to believe it."
The study was possible because reliable and consistent data is more readily available now and computers are more powerful than ever before, Blanchflower said.
"The last estimate was that if you just valued the computing we did, it's over $2 million of computing and 10 man-years," he said. Most of the computing was done at Dartmouth, and the study was funded by several grants.
Blanchflower said all the implications of the finding will not be clear for quite some time.
"It's not exactly clear what it means, in terms of policy. That's the next five years work," he said.
Blanchflower will spend next year at the London Business to continue work on the study. Oswald is currently at the London School of Economics, although he taught a class at Dartmouth last summer.
It also remains to be seen whether the new findings will be accepted by the economics community.
"This book is going to be very controversial," Blanchflower said. "It's a total shock ... Economists are not used to seeing claims that people have found a law."
But Blanchflower is confident that his conclusions will eventually be the new conventional wisdom. "The evidence is so incredibly powerful," he said.
"It's going to create a storm," he said. Indeed, the storm has already begun. The findings were reported last week in the Wall Street Journal, and Blanchflower said Newsweek called him yesterday.
