  Low inflation was once a welcome to both policy makers and the public.
However, Japan's experience during the 1990's changed the consensus view on
price of economists and central banks around the world. Facing deflation and
zero interest bound at the same time, Bank of Japan had difficulty in
conducting effective monetary policy. It made Japan's stagnation unusually
prolonged. Too low inflation which annoys central banks today is translated
into the "Phillips curve puzzle". In the US and Japan, in the course of
recovery from the Great Recession after the 2008 global financial crisis, the
unemployment rate had steadily declined to the level which was commonly
regarded as lower than the natural rate or NAIRU. And yet, inflation stayed
low. In this paper, we consider a minimal model of dual labor market to explore
what kind of change in the economy makes the Phillips curve flat. The level of
bargaining power of workers, the elasticity of the supply of labor to wage in
the secondary market, and the composition of the workforce are the main factors
in explaining the flattening of the Phillips curve. We argue that the changes
we consider in the model, in fact, has plausibly made the Phillips curve flat
in recent years.
