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Inflation and Wage Growth Since the Pandemic

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  • Òscar Jordà
  • Fernanda Nechio

Abstract

Following the worst of the COVID-19 pandemic, inflation has surged to 1980s levels in advanced economies. Motivated by vast differences in pandemic support across countries, we investigate the subsequent response of inflation and the feedback to wages. We exploit these differences to identify the effect these programs had on inflation and to examine the link between wages and inflation. Our empirical approach is based on a novel dynamic difference-in differences method based on local projections. Our estimates suggest that an increase of 5% in direct transfers (relative to trend) peaked at about an average 3 percentage points boost to the rate of inflation and wage growth after one year the support measures are introduced, with their effect waning by the second year. Moreover, since the pandemic and under a high-inflation environment, the role of inflation expectations on wage-setting dynamics have increased and become longer lasting.

Suggested Citation

  • Òscar Jordà & Fernanda Nechio, 2022. "Inflation and Wage Growth Since the Pandemic," Working Paper Series 2022-17, Federal Reserve Bank of San Francisco.
    • Handle: RePEc:fip:fedfwp:94747
    DOI: 10.24148/wp2022-17
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    Cited by:

    1. Cardani, Roberta & Pfeiffer, Philipp & Ratto, Marco & Vogel, Lukas, 2023. "The COVID-19 recession on both sides of the Atlantic: A model-based comparison," European Economic Review, Elsevier, vol. 158(C).
    2. Beckmann, Joscha & Czudaj, Robert L., 2024. "Uncertainty Shocks and Inflation: The Role of Credibility and Expectation Anchoring," MPRA Paper 119971, University Library of Munich, Germany.
    3. Wildauer, Rafael & Kohler, Karsten & Aboobaker, Adam & Guschanski, Alexander, 2023. "Energy price shocks, conflict inflation, and income distribution in a three-sector model," Energy Economics, Elsevier, vol. 127(PB).
    4. Galina Hale & John Leer & Fernanda Nechio, 2022. "Inflationary Effects of Fiscal Support to Households and Firms," Working Paper Series 2023-02, Federal Reserve Bank of San Francisco.

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    More about this item

    Keywords

    inflation; wages; fiscal transfers; covid19;
    All these keywords.

    JEL classification:

    • E01 - Macroeconomics and Monetary Economics - - General - - - Measurement and Data on National Income and Product Accounts and Wealth; Environmental Accounts
    • E30 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - General (includes Measurement and Data)
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E47 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Forecasting and Simulation: Models and Applications
    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers
    • F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions
    • F42 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Policy Coordination and Transmission
    • F44 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Business Cycles

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