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Wage share dynamics and second-round effects on inflation after energy price surges in the 1970s and today

Author

Listed:
  • Battistini, Niccolò
  • Grapow, Helen
  • Hahn, Elke
  • Soudan, Michel

Abstract

This box reviews wage share dynamics and potential second-round effects on inflation at times of energy price increases. Compared to a well-known episode with some similar features – the OPEC oil embargo in October 1973 – recent energy price increases have so far had limited implications for labour income and the GDP deflator. This contained impact reflects the relatively mild terms-of-trade loss and subdued real wage dynamics today compared to the 1970s. However, the experience in the United States in both episodes shows that significant increases in the GDP deflator may arise even in the presence of weak real wage growth. A model-based analysis finds that the transmission of energy price increases to inflation, and in particular the emergence of second-round effects, has been more limited or even absent since the start of monetary union. Nevertheless, high and persistent inflation increases the risk of second-round effects materialising via higher wages and profit margins. JEL Classification: E24, E25, E31, E37

Suggested Citation

  • Battistini, Niccolò & Grapow, Helen & Hahn, Elke & Soudan, Michel, 2022. "Wage share dynamics and second-round effects on inflation after energy price surges in the 1970s and today," Economic Bulletin Boxes, European Central Bank, vol. 5.
    • Handle: RePEc:ecb:ecbbox:2022:0005:2
    Note: 854549
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    File URL: https://www.ecb.europa.eu//press/economic-bulletin/focus/2022/html/ecb.ebbox202205_02~e203142329.en.html
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    Citations

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    Cited by:

    1. Francesco Corsello & Alex Tagliabracci, 2023. "Assessing the pass-through of energy prices to inflation in the euro area," Questioni di Economia e Finanza (Occasional Papers) 745, Bank of Italy, Economic Research and International Relations Area.
    2. Francesco Corsello & Matteo Gomellini & Dario Pellegrino, 2023. "Inflation and energy price shocks: lessons from the 1970s," Questioni di Economia e Finanza (Occasional Papers) 790, Bank of Italy, Economic Research and International Relations Area.
    3. Furuoka, Fumitaka & Yaya, OlaOluwa Simon & Ling, Pui Kiew & Al-Faryan, Mamdouh Abdulaziz Saleh & Islam, M. Nazmul, 2023. "Transmission of risks between energy and agricultural commodities: Frequency time-varying VAR, asymmetry and portfolio management," Resources Policy, Elsevier, vol. 81(C).
    4. Bank of Israel, 2023. "Labour market tightness and inflation in the aftermath of Covid-19: the case of Israel," BIS Papers chapters, in: Bank for International Settlements (ed.), Inflation and labour markets, volume 127, pages 179-194, Bank for International Settlements.

    More about this item

    Keywords

    inflation; second-round effects; Wages; wage share;
    All these keywords.

    JEL classification:

    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • E25 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Aggregate Factor Income Distribution
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E37 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Forecasting and Simulation: Models and Applications

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