Nominal Wage Growth Research Articles

Wage Growth, Labor Market Tightness, and Inflation: A Service Sector Analysis

This Economic Commentary explores the connections among labor market tightness, wage inflation, and price inflation at the service sector level. Across most service sectors, sector-specific labor market tightness and nominal wage growth have been above prepandemic averages since 2022. The data suggest that a stronger positive relationship between labor market tightness and wage growth has emerged in the aftermath of the pandemic. The relationship between sector-specific wage growth and inflation is more varied. In the education and health services sector, higher wage growth is associated with higher inflation after about one year; in the leisure and hospitality services sector, the positive relationship is contemporaneous. I do not find a significant relationship between wage growth and inflation in the other service sectors, such as transportation or financial and business services.

Wage–price spirals: what is the historical evidence?

AbstractHow common are wage–price spirals, and what has happened in their aftermath? We construct a new historical database of wage–price spirals—identified as episodes with consumer price inflation and average nominal wage growth rising jointly for at least a year—going back to the 1960s for a large sample of advanced economies. We find that only about a quarter of such episodes were followed by sustained accelerations in wages and prices. Instead, nominal wage growth and inflation tended to stabilize at a higher level on average, and then gradually revert, with real wage growth broadly unchanged. A decomposition of average wage dynamics during wage–price spiral episodes using a wage Phillips curve suggests that nominal wage growth normally stabilizes at levels consistent with observed inflation and labour market tightness. After historical episodes exhibiting rising inflation, falling real wages, and tightening labour markets—similar to what was observed in the early post‐COVID‐19 recovery in 2021—inflation tended to decline and nominal wage growth to rise, allowing real wages to gradually catch up. Our findings suggest that an acceleration of nominal wages against a backdrop of rising inflation does not necessarily signal that a persistent wage–price spiral dynamic is taking hold.

Wage-Price Spirals

ABSTRACT: We interpret recent inflation experience through the lens of a New Keynesian model with price and wage rigidities and nonlabor inputs in inelastic supply. The model provides a natural interpretation of some features of the recent episode: an initial surge of noncore inflation, followed by a lagged response of core inflation and a further lagged, persistent response of wage inflation. The model also provides a natural way of discussing the role and the strength of wage-price spiral dynamics in price-setting models. The model interprets recent developments as symptoms of underlying supply constraints, which can be triggered by both demand and supply shocks. The immediate manifestation of these constraints is in the relative price of scarce, inelastic nonlabor inputs (including energy). The secondary effects arise because they produce a gap between lowered real wage aspirations of firms—that try to make up for higher nonlabor costs—and increased real wage aspirations of workers—caused by increased labor demand. The gap produces a wage-price spiral, which continues as long as the initial relative scarcity of nonlabor inputs persists, even though input prices are falling. In this view, the fact that nominal wage growth is currently exceeding price inflation can be given a benign interpretation, as a sign of real wages going back to trend and not necessarily as a concern of an ongoing spiral.

Postpandemic Nominal Wage Growth: Inflation Pass-Through or Labor Market Imbalance?

Measures of wage growth have increased substantially during and after the pandemic compared to their average levels in the decade before. Does higher wage growth reflect compensation for a higher cost of living, brought about by an increase in inflation in the past two years? Or has an imbalance between strong labor demand and restrained labor supply lifted wage growth? Using a new empirical wage Phillips curve model, we find that the increase in wage growth largely reflects the pass-through of higher inflation and does not reflect labor market imbalances. The model forecasts a decline in wage growth to about 3 percent annually by 2025.

Wage growth in Lithuania from 2008 to 2020: observed drivers and underlying shocks

ABSTRACT This paper studies the drivers of wage growth in Lithuania over the period 2008–2020. Using administrative data as well as aggregate measures reflecting the state of the economy, we estimate an extended version of a wage Phillips curve. Our reduced-form estimates indicate that nominal wage growth was tightly linked to labor market fluctuation over this period. Labor productivity, changes in the minimum wage, and the composition of employment also contributed to wage dynamics. However, we find little evidence that past inflation has been a push factor. To understand the underlying economic primitives behind our findings, we estimate a structural Bayesian autoregressive model. Our structural analysis reveals a significant contribution from aggregate supply shocks, reflecting a stronger relationship between productivity and wages than implied by our reduced-form estimates. Moreover, a historical decomposition reveals that since 2013, wages grew over and above productivity due to rising aggregate demand and labor market disturbances.

Monetary policy when export revenues drop

We study how monetary policy should respond to shocks that permanently alter the steady state structure of the economy. In such a case monetary policy affects not only the short run misallocations due to nominal rigidities, but also relative prices which stimulate reallocation of capital. We consider a permanent and negative shock to export revenues that requires a larger traded sector and a smaller non-traded sector in the new steady state. This reallocation calls for a change in relative prices during the transition, but may also lead to a period of high unemployment. We show how an appropriate monetary policy could mitigate the welfare costs of the transition by allowing the exchange rate to depreciate, and thereby allowing inflation to increase in the short run. Traditional monetary policy regimes, such as inflation targeting or a fixed exchange rate, would imply high unemployment and inefficiently slow transition. Stabilizing nominal wage growth, in contrast, would be close to the welfare-optimal monetary policy.

Inflation and counter-inflationary policy measures: The case of Spain

Like in other European countries, several supply shocks (bottlenecks related to the end of the pandemic, tensions in international gas and oil prices, and war in Ukraine) have led to a rise in the inflation rate in Spain since March 2021. This has been amplified by the functioning of energy markets, especially electricity, and price increases have spread progressively to other sectors. As a result, the forecast average inflation in 2022 is 8.5%, similar to the Eurozone average. Until August 2022, Spain had a year-on-year inflation rate above this average, but the trend has changed: in October, inflation fell by 3.4 pp in Spain, while it had risen by 1.6 pp in the monetary union. Spain was the economy with the second lowest inflation. The authorities have adopted significant measures to reduce inflation, especially in energy (capping gas in the electricity market, limiting the gas price for consumers in the regulated tariff, lowering indirect taxes, or discounts for vulnerable households) and public transport and housing rents. Other measures include transfers to the most affected households and economic sectors to offset the effects of inflation. Despite this, weak nominal wage growth and the pass-through by firms of higher costs to their prices (maintaining or increasing profit margins) are leading to an unequal distribution of the effects of inflation, which wage earners mainly bear. Changing this situation should be the focus of economic policy from now on.

Intergenerational consequences of gradual pension reforms

Balancing the government budget in an aging economy may require adjusting gradually pension benefits. Such policy change can take two forms: adjusting the accrual rate (the rate at which individuals built-up pension entitlements while working) or the indexation rate (the rate a which accrued entitlements are linked to nominal wage growth). We compare the consequences of such gradual policies across cohorts. We identify a fundamental generational trade-off between democracy and equality. In particular, we show that for Belgium, 80% of the population alive at the time of the reform prefers the accrual to the indexation reform, with the implication that the youngest half of the population would bear 85% of the total adjustment cost. The indexation reform provides more generational equality because the phasing in over time has larger base and thus benefit cut can be smaller per capita. We then consider other reforms improving the generational equality, showing that all those reforms fail to gain majority support. Finally, considering labor incentives, we show that the indexation reform is also more efficient than the accrual reform. Efficiency meets generational equality.

INCOME AS ONE OF THE WELL-BEING FACTORS OF THE POPULATION OF UKRAINE: CURRENT STATE

INCOME AS ONE OF THE WELL-BEING FACTORS OF THE POPULATION OF UKRAINE: CURRENT STATE

(Dis)Solving the Zero Lower Bound Equilibrium through Income Policy

AbstractWe investigate the possibility to reflate an economy experiencing a long‐lasting zero lower bound episode with subdued or negative inflation by imposing a minimum level of wage inflation. The income policy under investigation is formalized as a downward nominal wage growth rigidity, such that wage inflation cannot be lower than a fraction of the inflation target. This policy allows dissolving the zero lower bound steady‐state equilibrium in an Overlapping Generations (OLG) model featuring “secular stagnation” and in an infinite‐life model, where this equilibrium emerges due to deflationary expectations.

Stagnant services and the gradual disinflation of advanced economies

In advanced economies, nominal wage growth and inflation have been falling in secular terms since the early 1980s. Drawing on debates on industrial composition and industrial dualism, I argue that a key driver of falling wage growth and inflation has been the growing share of employment in “stagnant services”: those with limited productivity growth, competitive product markets, and thin profit margins. In these services, it is difficult to raise wages and prices. I use these insights to revisit Baumol's cost disease theory, arguing that weak wage growth in stagnant services has spilled over to other sectors with more room for wage growth, resulting in the gradual disinflation observed in recent decades. Using graphical plots and error correction models of nominal wage growth and inflation in 21 advanced economies from 1972-2009, the analysis shows that employment growth in stagnant services over this period was associated with a reduction of nominal wage growth and inflation by more than half. Without deep changes in stagnant services, slow wage and price growth are here to stay.

The role of wages in the Eurozone

There are two main political economy explanations of the Eurocrisis. The labor market view regards cross-country differences in wage bargaining institutions as the root cause of the crisis. The finance view, instead, emphasizes cross-border financial flows and downplays labor market institutions. For the first time, we attempt to assess these two explanations jointly. We find that financial flows are better predictors of nominal wage growth than labor market institutions. At the same time, we show that wage moderation matters for bilateral export performance in the important case of Germany, but not for other countries. These results suggest that imposing wage moderation and labor market reforms onto the countries of the European periphery was unlikely to improve their plight. In contrast, stimulating wage growth in Germany might have contributed to rebalancing the Eurozone.

Asymmetric Business Cycles in Segmented Labour Markets

We document the presence of asymmetric business cycles in both regular and contract labour markets in India and investigate the role of nominal wage rigidities and labour adjustment costs in accounting for these asymmetries. Using data from Annual Survey of Industries, we find that (i) the growth rate of output is negatively skewed, (ii) the growth of regular employment is negatively skewed while that of contract employment is positively skewed, (iii) the nominal wage growth of regular workers is positively skewed while that of contract workers is negatively skewed. We show that a standard business cycle model augmented with asymmetric wage adjustment cost for both regular and contract labour coupled with symmetric labour adjustment cost for regular workers does a good job of explaining the asymmetries in both output and employment cycles. We also find that the presence of contract labour relaxes the constraint of downward nominal wage rigidity, and hence decreases the optimal level of grease inflation required in the economy.

Монетарные и немонетарные факторы инфляции

In continuation of our scientific research, published in the previous issue of the journal, this article was written. In the process of research, the methods of analysis and synthesis, the graphic method were used. The results of this study prove the general theoretical conclusion about the relationship between nominal wage growth and inflation. Achieving financial stability is possible with a decrease in the rate of inflation. Based on the analysis of the scientific periodic and monographic literature, the calculations we have cited, the article concluded that the reasons for inflation in Russia are mostly non-monetary. But when choosing a macroeconomic policy, it is necessary to base on the coordination of influence on both monetary and non-monetary factors of inflation.

Labour Market Conditions and Wage Inflation in CEE Economies

In this paper, we test whether a wage Phillips curve can still be considered a reliable approximation of nominal wage determination in Poland, Hungary and the Czech Republic. The empirical evidence is broadly in favour of the existence of a negative relation between labour market slack and nominal wage inflation in the Central and Eastern European (CEE) economies between 2001 and 2017. However, after 2009 wage inflation was significantly below the value that would have been predicted by an estimated wage Phillips curve. The results of rolling OLS estimations confirm a weakening of the negative relation with the unemployment gap. A closer look at the recent evolution of labour market conditions in Poland, Hungary and the Czech Republic suggests that the composition effects on labour supply, especially those linked to demographic and migration trends, could be particularly relevant. Other possible explanations generally mentioned with reference to advanced economies - such as a large share of long-term unemployment, part-time and temporary workers or workers that are underemployed or marginally attached to the labour market - probably had no role or only a marginal one in the recent weak nominal wage growth in the three countries.

More Slack than Meets the Eye? Recent Wage Dynamics in Advanced Economies

Nominal wage growth in most advanced economies remains markedly lower than it was before the Great Recession of 2008–09. This paper finds that the bulk of the wage slowdown is accounted for by labor market slack, inflation expectations, and trend productivity growth. In particular, there appears to be greater slack than meets the eye. Involuntary part-time employment appears to have weakened wage growth even in economies where headline unemployment rates are now at, or below, their averages in the years leading up to the recession.

More Slack than Meets the Eye? Recent Wage Dynamics in Advanced Economies

Nominal wage growth in most advanced economies remains markedly lower than it was before the Great Recession of 2008-09. This paper finds that the bulk of the wage slowdown is accounted for by labor market slack, inflation expectations, and trend productivity growth. In particular, there appears to be greater slack than meets the eye. Involuntary part-time employment appears to have weakened wage growth even in economies where headline unemployment rates are now at, or below, their averages in the years leading up to the recession.

Assessing DSGE model nonlinearities

We develop a new class of time series models to identify nonlinearities in the data and to evaluate DSGE models. U.S. output growth and the federal funds rate display nonlinear conditional mean dynamics, while inflation and nominal wage growth feature conditional heteroskedasticity. We estimate a DSGE model with asymmetric wage and price adjustment costs and use predictive checks to assess its ability to account for these nonlinearities. While it is able to match the nonlinear inflation and wage dynamics, thanks to the estimated downward wage and price rigidities, these do not spill over to output growth or the interest rate.

Wage Growth after the Great Recession

Nominal wage growth since the Great Recession has been sluggish. We show that the sluggishness is due mostly to weak growth in labor productivity, as well as lower-than-expected inflation. We also find that wage growth since late 2014 has actually been above what would be consistent with realized labor-productivity growth and inflation, and this trend in wages reflects an increase in labor's share of income. We show evidence that this increase in the labor share may be due to a reversal of the trend to replace labor with capital.

The Relative Power of Employment-to-Employment Reallocation and Unemployment Exits in Predicting Wage Growth

We study the cyclical comovement nominal wage growth (either monthly earnings or hourly wage rate) and labor market flows. We use microdata from the Survey of Income and Program Participation over 1996-2013 to purge composition effects in worker and job characteristics and to isolate the reallocative effect of Employer-to-Employer (EE) transitions. We find an “EE wage Phillips curve”: wage inflation comoves positively with EE as strongly as with the employment rate. This correlation holds for job stayers; we interpret the EE rate as a measure of labor demand. We find no analogous evidence for the job-finding rate from unemployment.