Has the wage Phillips curve changed in the euro area?

Guido Bulligan,Eliana Viviano

doi:10.1186/s40173-017-0087-z

Abstract

Increasing evidence shows that in the aftermath of the global financial crisis, in the euro area, the relationship between price inflation and economic slack became stronger. Instead, there is no clear evidence of a strong(er) relationship between wage inflation and unemployment. In this paper, we estimate a Phillips curve with time-varying coefficients separately for Italy, Spain, Germany and France and we find that, with the exception of Germany, after the global financial crisis, the sensitivity of hourly wage changes to labour market slack increased. Second, by the use of administrative microdata, available only for Italy, we relate daily wage changes to the local unemployment rate. The results confirm the steepening of the Phillips curve after 2008, also when controlling for composition effects.

Highlights

After the global financial crisis, the debate about the short-run determinants of inflation has gained momentum
The so-called twin puzzle of missing disinflation in the aftermath of the great financial crisis and persistently low inflation in spite of the ongoing recovery in the euro area following the sovereign debt crisis have led many to rethink about the Phillips curve
While most of the literature has focused on the relationship between consumer’ and/or producer’ price inflation and economic slack, in this paper, we look at wage inflation for two important reasons

Summary

Introduction

After the global financial crisis, the debate about the short-run determinants of inflation has gained momentum. Font et al (2015) show that in Spain, real wages of newly hired workers and temporary workers are more sensitive to the business cycle, suggesting indirectly that changes in workers’ composition can affect the dynamics of aggregate wages and its reaction to unemployment With respect to these papers, our contribution is to use very flexible tests and techniques for the case of a timevarying PC and to show that composition effects may certainly help to explain part the steepening of the PC. This is a preliminary step for formally testing the hypothesis of changes in the slope of the PC in the remaining part of the section.

Macro evidence

Findings

Conclusions