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Time-varying wage Phillips curves in the euro area with a new measure for labor market slack

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  • Bonam, Dennis
  • de Haan, Jakob
  • van Limbergen, Duncan

Abstract

In recent years, the relationship between wage growth and the unemployment gap, known as the wage Phillips curve, has been puzzlingly weak: whereas the unemployment gap was low, wage growth was low as well. We consider two possible explanations for this ‘low wage growth puzzle’: (i) a structural change in the relationship between wage growth and labor market slack, and (ii) a failure of the unemployment gap to adequately capture labor demand conditions. We propose a new measure for labor market slack based on a survey among firms asking whether the shortage of labor is limiting production. This labor shortage indicator points to hidden slack not captured by the unemployment gap, which resolves the low wage growth puzzle. Our estimates of the wage Phillips curve for the five biggest euro area countries also suggest that the wage Phillips curve has changed over time, but not uniformly across countries.

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  • Bonam, Dennis & de Haan, Jakob & van Limbergen, Duncan, 2021. "Time-varying wage Phillips curves in the euro area with a new measure for labor market slack," Economic Modelling, Elsevier, vol. 96(C), pages 157-171.
    • Handle: RePEc:eee:ecmode:v:96:y:2021:i:c:p:157-171
    DOI: 10.1016/j.econmod.2020.12.027
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    References listed on IDEAS

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    2. Lehner, Lukas & Ramskogler, Paul & Riedl, Aleksandra, 2022. "Begging thy coworker – Labor market dualization and the slow-down of wage growth in Europe," INET Oxford Working Papers 2022-04, Institute for New Economic Thinking at the Oxford Martin School, University of Oxford.
    3. Dovì, Max-Sebastian & Koester, Gerrit & Nickel, Christiane, 2021. "Addressing the endogeneity of slack in Phillips Curves," Working Paper Series 2619, European Central Bank.
    4. Lucia Svabova & Eva Nahalkova Tesarova & Marek Durica & Lenka Strakova, 2021. "Evaluation of the impacts of the COVID-19 pandemic on the development of the unemployment rate in Slovakia: counterfactual before-after comparison," Equilibrium. Quarterly Journal of Economics and Economic Policy, Institute of Economic Research, vol. 16(2), pages 261-284, June.

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    More about this item

    Keywords

    Wage Phillips curve; Labor shortage indicator; Time-varying parameters;
    All these keywords.

    JEL classification:

    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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