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Globalisation and the Decoupling of Inflation from Domestic Labour Costs

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  • Emanuel Kohlscheen
  • Richhild Moessner

Abstract

We provide novel systematic cross-country evidence that the link between domestic labour markets and CPI inflation has weakened considerably in advanced economies during recent decades. The central estimate is that the short-run pass-through from domestic labour cost changes to core CPI inflation decreased from 0.25 in the 1980s to just 0.02 in the 2010s, while the long-run pass-through fell from 0.36 to 0.03. We show that the timing of the collapse in the pass-through coincides with a steep increase in import penetration from a group of 10 major manufacturing EMEs around the turn of the millennium. This signals increased competition and market contestability. Besides the extent of trade openness, we show that the intensity of the pass-through also depends in a non-linear way on the average level of inflation.

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  • Emanuel Kohlscheen & Richhild Moessner, 2022. "Globalisation and the Decoupling of Inflation from Domestic Labour Costs," Papers 2208.14651, arXiv.org.
    • Handle: RePEc:arx:papers:2208.14651
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    References listed on IDEAS

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    1. Auer, Raphael A. & Degen, Kathrin & Fischer, Andreas M., 2013. "Low-wage import competition, inflationary pressure, and industry dynamics in Europe," European Economic Review, Elsevier, vol. 59(C), pages 141-166.
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    3. Sebastian Heise & Fatih Karahan & Ayşegül Şahin, 2022. "The Missing Inflation Puzzle: The Role of the Wage‐Price Pass‐Through," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 54(S1), pages 7-51, February.
    4. Auer, Raphael A. & Degen, Kathrin & Fischer, Andreas M., 2013. "Low-wage import competition, inflationary pressure, and industry dynamics in Europe," European Economic Review, Elsevier, vol. 59(C), pages 141-166.
    5. Kristin Forbes, 2019. "Inflation Dynamics: Dead, Dormant, or Determined Abroad?," NBER Working Papers 26496, National Bureau of Economic Research, Inc.
    6. Elena Bobeica & Matteo Ciccarelli & Isabel Vansteenkiste, 2019. "The link between labor cost and price inflation in the euro area," Working Papers Central Bank of Chile 848, Central Bank of Chile.
    7. Ekaterina V. Peneva & Jeremy B. Rudd, 2017. "The Passthrough of Labor Costs to Price Inflation," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 49(8), pages 1777-1802, December.
    8. Gordon, Robert J, 1988. "The Role of Wages in the Inflation Process," American Economic Review, American Economic Association, vol. 78(2), pages 276-283, May.
    9. Axel Dreher, 2006. "Does globalization affect growth? Evidence from a new index of globalization," Applied Economics, Taylor & Francis Journals, vol. 38(10), pages 1091-1110.
    10. Martina Jašová & Richhild Moessner & Elöd Takáts, 2019. "Exchange Rate Pass-Through: What Has Changed Since the Crisis?," International Journal of Central Banking, International Journal of Central Banking, vol. 15(3), pages 27-58, September.
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    Cited by:

    1. Kohlscheen, Emanuel & Moessner, Richhild, 2022. "Globalisation and the slope of the Phillips curve," Economics Letters, Elsevier, vol. 216(C).
    2. Wifo, 2023. "WIFO-Monatsberichte, Heft 9/2023," WIFO Monatsberichte (monthly reports), WIFO, vol. 96(9), September.
    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.

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    More about this item

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General
    • F10 - International Economics - - Trade - - - General
    • F60 - International Economics - - Economic Impacts of Globalization - - - General
    • J30 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - General

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