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The role of wages in the pick-up of inflation

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  • Gumiel, José
  • Hahn, Elke

Abstract

In current forecasts and projections, a pick-up in labour costs is considered an important precondition for a sustained increase in underlying inflation. However, the signals provided by different labour cost indicators have been mixed for some time. While wage growth as measured by compensation per employee or by compensation per hour worked has clearly strengthened over the past two years, unit labour cost growth, i.e. wage growth adjusted for productivity growth, has remained rather flat over the same period. This begs the question: which labour cost indicators provide the relevant signal for the pass-through to, and the outlook for, underlying inflation? This box tries to shed some light on this issue by analysing the transmission of two different types of macroeconomic impulse, namely certain kinds of supply and demand shock, in the context of the New Area-Wide Model, and by comparing the results with the patterns of development observed in the recent past. JEL Classification: E31, J30

Suggested Citation

  • Gumiel, José & Hahn, Elke, 2018. "The role of wages in the pick-up of inflation," Economic Bulletin Boxes, European Central Bank, vol. 5.
    • Handle: RePEc:ecb:ecbbox:2018:0005:4
    Note: 854549
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    File URL: https://www.ecb.europa.eu//pub/economic-bulletin/focus/2018/html/ecb.ebbox201805_04.en.html
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    References listed on IDEAS

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    1. Warne, Anders & Coenen, Günter & Christoffel, Kai, 2008. "The new area-wide model of the euro area: a micro-founded open-economy model for forecasting and policy analysis," Working Paper Series 944, European Central Bank.
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    Citations

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    Cited by:

    1. Ramskogler, Paul, 2021. "Labour market hierarchies and the macro-economy – Do labour market dualities affect wage growth in Europe?," Structural Change and Economic Dynamics, Elsevier, vol. 56(C), pages 154-165.
    2. Elena Bobeica & Matteo Ciccarelli & Isabel Vansteenkiste, 2019. "The link between labor cost and price inflation in the euro area," Working Papers Central Bank of Chile 848, Central Bank of Chile.
    3. Fabian Eser & Peter Karadi & Philip R. Lane & Laura Moretti & Chiara Osbat, 2020. "The Phillips Curve at the ECB," Manchester School, University of Manchester, vol. 88(S1), pages 50-85, September.
    4. Bobeica, Elena & Koester, Gerrit & Lis, Eliza & Nickel, Christiane & Porqueddu, Mario, 2019. "Understanding low wage growth in the euro area and European countries," Occasional Paper Series 232, European Central Bank.
    5. Elke Hahn, 2021. "How are wage developments passed through to prices in the euro area? Evidence from a BVAR model," Applied Economics, Taylor & Francis Journals, vol. 53(22), pages 2467-2485, May.
    6. Hahn, Elke, 2020. "The wage-price pass-through in the euro area: does the growth regime matter?," Working Paper Series 2485, European Central Bank.
    7. Bobeica, Elena & Ciccarelli, Matteo & Vansteenkiste, Isabel, 2021. "The changing link between labor cost and price inflation in the United States," Working Paper Series 2583, European Central Bank.
    8. Brand, Claus & Obstbaum, Meri & Coenen, Günter & Sondermann, David & Lydon, Reamonn & Ajevskis, Viktors & Hammermann, Felix & Angino, Siria & Hernborg, Nils & Basso, Henrique & Hertweck, Matthias & Bi, 2021. "Employment and the conduct of monetary policy in the euro area," Occasional Paper Series 275, European Central Bank.
    9. Koester, Gerrit & Lis, Eliza & Nickel, Christiane & Osbat, Chiara & Smets, Frank, 2021. "Understanding low inflation in the euro area from 2013 to 2019: cyclical and structural drivers," Occasional Paper Series 280, European Central Bank.
    10. Antonio M. Conti & Andrea Nobili, 2019. "Wages and prices in the euro area: exploring the nexus," Questioni di Economia e Finanza (Occasional Papers) 518, Bank of Italy, Economic Research and International Relations Area.

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    More about this item

    Keywords

    euro area inflation; pass-through of wages to prices;

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • J30 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - General

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