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Do wages help predict inflation?

Author

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  • Kenneth M. Emery
  • Chih-Ping Chang

Abstract

In the financial press, productivity-related wages are often cited as an inflation indicator. For example, recently slow rates of wage growth have been noted as a factor that will keep inflation rates low in the future. While inflation and wage growth do appear to be highly correlated over longer time periods, it is not clear whether movements in wage growth precede movements in inflation, thereby providing predictive content for future inflation. In this article, Kenneth Emery and Chih-Ping Chang examine the usefulness of wage growth as a predictor of inflation, as well as carry out a stability analysis of the relationship underlying inflation and wages. The results caution against using wage growth as a signal of future inflation in that wage growth has no information content for future inflation. Furthermore, the bivariate relationship between inflation and wage growth is shown to be unstable.

Suggested Citation

  • Kenneth M. Emery & Chih-Ping Chang, 1996. "Do wages help predict inflation?," Economic and Financial Policy Review, Federal Reserve Bank of Dallas, issue Q I, pages 2-9.
  • Handle: RePEc:fip:fedder:y:1996:i:qi:p:2-9
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    File URL: http://www.dallasfed.org/assets/documents/research/er/1996/er9601a.pdf
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    References listed on IDEAS

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    4. Yock Y. Chong & David F. Hendry, 1986. "Econometric Evaluation of Linear Macro-Economic Models," Review of Economic Studies, Oxford University Press, vol. 53(4), pages 671-690.
    5. Stock, James H & Watson, Mark W, 1993. "A Simple Estimator of Cointegrating Vectors in Higher Order Integrated Systems," Econometrica, Econometric Society, vol. 61(4), pages 783-820, July.
    6. Yash P. Mehra, 1993. "Unit labor costs and the price level," Economic Quarterly, Federal Reserve Bank of Richmond, issue Fall, pages 35-52.
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    Citations

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    Cited by:

    1. Bobeica, Elena & Ciccarelli, Matteo & Vansteenkiste, Isabel, 2019. "The link between labor cost and price inflation in the euro area," Working Paper Series 2235, European Central Bank.
    2. Attilio Zanetti, 2007. "Do Wages Lead Inflation? Swiss Evidence," Swiss Journal of Economics and Statistics (SJES), Swiss Society of Economics and Statistics (SSES), vol. 143(I), pages 67-92, March.
    3. Robert W. Rich & Donald Rissmiller, 2000. "Understanding the recent behavior of U.S. inflation," Current Issues in Economics and Finance, Federal Reserve Bank of New York, vol. 6(Jul).
    4. Yash P. Mehra, 2000. "Wage-price dynamics : are they consistent with cost push?," Economic Quarterly, Federal Reserve Bank of Richmond, issue Sum, pages 27-43.

    More about this item

    Keywords

    Inflation (Finance) ; Wages;

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