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Wage growth and inflation in Europe: a puzzle?

Author

Listed:
  • Vizhdan Boranova
  • Raju Huidrom
  • Sylwia Nowak
  • Petia Topalova
  • Volodymyr Tulin
  • Richard Varghese

Abstract

In many European countries, prior to the pandemic, wages rose faster than productivity, yet consumer price pressures remained subdued. This is puzzling as theory suggests that inflation would pick up with a rise in wage growth that exceeds productivity growth. To shed light on this puzzle, we analyze the transmission of wage shocks to core inflation for a sample of 27 European countries over the period 1995Q1–2019Q1. More importantly, we assess how the transmission depends on a set of factors. We find that historically wage growth has led to higher inflation but the impact has weakened since the global financial crisis. Our analysis shows that the passthrough from wage growth to inflation is significantly lower in periods of subdued inflation and inflation expectations, greater competitive pressures, and robust corporate profitability.

Suggested Citation

  • Vizhdan Boranova & Raju Huidrom & Sylwia Nowak & Petia Topalova & Volodymyr Tulin & Richard Varghese, 2021. "Wage growth and inflation in Europe: a puzzle?," Oxford Economic Papers, Oxford University Press, vol. 73(4), pages 1427-1453.
    • Handle: RePEc:oup:oxecpp:v:73:y:2021:i:4:p:1427-1453.
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    File URL: http://hdl.handle.net/10.1093/oep/gpab051
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    Citations

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    Cited by:

    1. Christian P Pinshi, 2022. "Ciblage des prévisions d'inflation : Un nouveau cadre pour la politique monétaire ?," Working Papers hal-03548273, HAL.
    2. Ms. Enrica Detragiache & Mr. Christian H Ebeke & La-Bhus Fah Jirasavetakul & Koralai Kirabaeva & Mr. Davide Malacrino & Florian Misch & Mr. Hyun Park & Ms. Yu Shi, 2020. "A European Minimum Wage: Implications for Poverty and Macroeconomic Imbalances," IMF Working Papers 2020/059, International Monetary Fund.
    3. Gabriel Felbermayr & Benjamin Bittschi & Josef Baumgartner, 2023. "Kollektivvertragsverhandlungen in Zeiten hoher Inflation," WIFO Monatsberichte (monthly reports), WIFO, vol. 96(9), pages 613-632, September.
    4. Hahn, Elke, 2020. "The wage-price pass-through in the euro area: does the growth regime matter?," Working Paper Series 2485, European Central Bank.
    5. Wifo, 2023. "WIFO-Monatsberichte, Heft 9/2023," WIFO Monatsberichte (monthly reports), WIFO, vol. 96(9), September.
    6. Niels Martin & Iris Beerepoot, 2025. "Unveiling Use Cases for Human Resource Mining," Business & Information Systems Engineering: The International Journal of WIRTSCHAFTSINFORMATIK, Springer;Gesellschaft für Informatik e.V. (GI), vol. 67(4), pages 531-550, August.
    7. PINSHI, Christian P., 2022. "Inflation-Forecast Targeting: A New Framework for Monetary Policy?," MPRA Paper 111709, University Library of Munich, Germany.
    8. Koester, Gerrit & Lis, Eliza & Nickel, Christiane & Osbat, Chiara & Smets, Frank, 2021. "Understanding low inflation in the euro area from 2013 to 2019: cyclical and structural drivers," Occasional Paper Series 280, European Central Bank.

    More about this item

    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

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