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Wages, inflation and a negative supply shock

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Abstract

The sharp increase in inflation rates to 10% and higher that we have seen over the past months as a result of a negative, import-driven supply shock poses a serious challenge to wage setters. So far, collectively bargained wages have barely reacted to the current rise in inflation. However, given empirical estimates of wage equations and the institutional features of wage bargaining, it can be expected that wage growth will respond to higher inflation with a lag. Forward-looking indicators of negotiated wages also point to higher future wage growth. This raises the question as to what extent wage growth should compensate for inflation. We argue that, based on the implicit aim of collective bargaining of keeping the wage share constant, nominal wages should grow in line with labor productivity as well as the increase of output prices or core inflation rather than in line with total consumer price inflation.

Suggested Citation

  • Alfred Stiglbauer, 2023. "Wages, inflation and a negative supply shock," Monetary Policy & the Economy, Oesterreichische Nationalbank (Austrian Central Bank), issue Q4/22-Q1/, pages 4/22-1/23.
    • Handle: RePEc:onb:oenbmp:y:2023:i:q4/22-q1/23:b:6
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    More about this item

    Keywords

    inflation; wages; wage-price spiral;
    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
    • J50 - Labor and Demographic Economics - - Labor-Management Relations, Trade Unions, and Collective Bargaining - - - General

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