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A Measure of Trend Wage Inflation

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Abstract

We extend time-series models that have so far been used to study price inflation (Stock and Watson [2016a]) and apply them to a micro-level dataset containing worker-level information on hourly wages. We construct a measure of aggregate nominal wage growth that (i) filters out noise and very transitory movements, (ii) quantifies the importance of idiosyncratic factors for aggregate wage dynamics, and (iii) strongly co-moves with labor market tightness, unlike existing indicators of wage inflation. We show that our measure is a reliable real-time indicator of wage pressures and a good predictor of future wage growth.

Suggested Citation

  • Richard Audoly & Martín Almuzara & Davide Melcangi, 2023. "A Measure of Trend Wage Inflation," Staff Reports 1067, Federal Reserve Bank of New York.
    • Handle: RePEc:fip:fednsr:96479
    Note: Revised November 2024. Previous title: “A Measure of Core Wage Inflation”
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    References listed on IDEAS

    as
    1. James H. Stock & Mark W. Watson, 2008. "Phillips curve inflation forecasts," Conference Series ; [Proceedings], Federal Reserve Bank of Boston.
    2. George A. Akerlof & Janet L. Yellen, 1990. "The Fair Wage-Effort Hypothesis and Unemployment," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 105(2), pages 255-283.
    3. James H. Stock & Mark W. Watson, 2016. "Core Inflation and Trend Inflation," The Review of Economics and Statistics, MIT Press, vol. 98(4), pages 770-784, October.
    4. Hie Joo Ahn & Han Chen & Michael Kister, 2020. "A New Indicator of Common Wage Inflation," FEDS Notes 2020-07-08, Board of Governors of the Federal Reserve System (U.S.).
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    12. Hervé Le Bihan & Jérémi Montornès & Thomas Heckel, 2012. "Sticky Wages: Evidence from Quarterly Microeconomic Data," American Economic Journal: Macroeconomics, American Economic Association, vol. 4(3), pages 1-32, July.
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    More about this item

    Keywords

    wage inflation; persistence; factor models;
    All these keywords.

    JEL classification:

    • C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models
    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity

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