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Missing wage growth in the euro area: is the wage Philips curve non-linear?

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  • Byrne, David

    (Central Bank of Ireland)

  • Zekaite, Zivile

    (Central Bank of Ireland)

Abstract

This Letter examines the relationship between wage growth and labour market tightness in the euro area, frequently represented by the Phillips curve. It predicts that falling unemployment should lead to greater wage growth. A key question for policymakers post-crisis is whether this relationship has changed or broken down. We show that the euro area wage Phillips curve is non-linear. When labour market slack is elevated, tightening does not lead to greater wage growth. The relationship only returns when slack is at lower levels. This finding explains why wage growth did not increase when the labour market tightened between 2013 and 2016, and why stronger wage growth has been evident since 2017.

Suggested Citation

  • Byrne, David & Zekaite, Zivile, 2018. "Missing wage growth in the euro area: is the wage Philips curve non-linear?," Economic Letters 9/EL/18, Central Bank of Ireland.
    • Handle: RePEc:cbi:ecolet:9/el/18
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    References listed on IDEAS

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    Cited by:

    1. Daniel Sebastião Abreu & Artur Silva Lopes, 2021. "How to disappear completely: nonlinearity and endogeneity in the New Keynesian Wage Phillips Curve," Applied Economics Letters, Taylor & Francis Journals, vol. 28(9), pages 774-778, May.
    2. Byrne, Stephen & McIndoe-Calder, Tara, 2019. "Employment Growth: Where Do We Go From Here?," Quarterly Bulletin Articles, Central Bank of Ireland, pages 122-148, July.
    3. Frohm, Erik, 2020. "Labor shortages and wage growth," Working Paper Series 394, Sveriges Riksbank (Central Bank of Sweden).
    4. Nickel, Christiane & Bobeica, Elena & Koester, Gerrit & Lis, Eliza & Porqueddu, Mario, 2019. "Understanding low wage growth in the euro area and European countries," Occasional Paper Series 232, European Central Bank.
    5. Dennis Bonam & Gabriele Galati & Irma Hindrayanto & Marco Hoeberichts & Anna Samarina & Irina Stanga, 2019. "Inflation in the euro area since the Global Financial Crisis," DNB Occasional Studies 1703, Netherlands Central Bank, Research Department.
    6. Boyd, Laura & Keenan, Enda & McIndoe-Calder, Tara, 2023. "Earnings growth under high inflation," Quarterly Bulletin Articles, Central Bank of Ireland, pages 89-123, September.
    7. Darracq Pariès, Matthieu & Notarpietro, Alessandro & Kilponen, Juha & Papadopoulou, Niki & Zimic, Srečko & Aldama, Pierre & Langenus, Geert & Alvarez, Luis Julian & Lemoine, Matthieu & Angelini, Elena, 2021. "Review of macroeconomic modelling in the Eurosystem: current practices and scope for improvement," Occasional Paper Series 267, European Central Bank.

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