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Price level dynamics, wages and distribution

Author

Listed:
  • Martin, Anne
  • Herr, Hansjörg
  • Heine, Michael

Abstract

Inflationary processes are closely linked to wage-price spirals - such spirals can be triggered by many factors, including natural resource price shocks, depreciation and inflationary demand. Empirically, the correlation between changes in nominal unit labour costs and the price level is strong for almost all OECD countries, at levels above 0.8. The clear policy conclusion is to make wages and the nominal exchange rate anchors for the price level, which implies that nominal wages should increase according to trends in productivity and the target inflation rate of the central bank. Wage developments without structural changes in the medium term have limited effects on functional income distribution on a macroeconomic level. The structural factors in question include the existence and spread of markets with monopolies, oligopolies and monopsonies as well as corporate governance systems and the power of trade unions to influence profit sharing in companies with rent.

Suggested Citation

  • Martin, Anne & Herr, Hansjörg & Heine, Michael, 2024. "Price level dynamics, wages and distribution," IPE Working Papers 234/2024, Berlin School of Economics and Law, Institute for International Political Economy (IPE).
    • Handle: RePEc:zbw:ipewps:300570
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    More about this item

    Keywords

    Wage-price spiral; inflation; functional distribution;
    All these keywords.

    JEL classification:

    • E12 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Keynes; Keynesian; Post-Keynesian; Modern Monetary Theory
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E64 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Incomes Policy; Price Policy

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