Has the Wage Phillips Curve Changed in the Euro Area?

Guido Bulligan,Eliana Viviano

doi:10.2139/ssrn.2910397

Abstract

Increasing evidence shows that after a flattening occurred in the immediate aftermath of the global financial crisis, the relationship between price inflation and economic slack became stronger in the euro area. By contrast, there is no clear evidence of a strong(er) relationship between wage inflation and unemployment. In this paper we estimate a standard Phillips curve with time-varying coefficients separately for Italy, Spain, Germany and France. 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, using 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 global 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’ 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. This is a preliminary step for formally testing the hypothesis of changes in the slope of the PC. The coefficients δ1 and δ2 represent the correlation between the unemployment rate and wage growth not captured by the correlation between wage growth and inflation expectations Since both equations 7 and 8 include the lagged value of the dependent variables, estimates can be biased (and since we are using panel data this bias does not vanish as the time dimension of our dataset increases). As for firms, changes in workers’ compositions are unlikely to be the (only) cause of the steepening of the PC in Italy after 2008

Conclusions

Findings

Tables and figures