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Bending the Curves: Wages and Inflation

Author

Listed:
  • Dany Brouillette
  • Madigan Dockrill
  • Helen Lao
  • Laurence Savoie-Chabot

Abstract

As economic slack continues to be absorbed and the labour market tightens, wage growth and inflation could increase faster than expected, which would suggest convexity in their Phillips curves. This note investigates whether there is convexity in the Phillips curves for Canadian wage growth and inflation by testing different empirical approaches over the post-inflation-targeting period. We conclude that while there is some evidence that the relationship between wage growth—as indicated by the Bank of Canada wage-common measure—and the output gap is non-linear in Canada, there is no clear evidence of a convex relationship between inflation and the output gap. The presence of downward nominal wage rigidity could likely explain these results. The risk of a sharp increase in CPI inflation therefore appears to be small over the projection horizon (2018–20) since the Canadian economy is expected to experience only modest excess demand.

Suggested Citation

  • Dany Brouillette & Madigan Dockrill & Helen Lao & Laurence Savoie-Chabot, 2018. "Bending the Curves: Wages and Inflation," Staff Analytical Notes 2018-15, Bank of Canada.
    • Handle: RePEc:bca:bocsan:18-15
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    References listed on IDEAS

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    1. Tiff Macklem, 1997. "Capacity constraints, price adjustment, and monetary policy," Bank of Canada Review, Bank of Canada, vol. 1997(Spring), pages 39-56.
    2. Konrad Zmitrowicz & Mikael Khan, 2014. "Beyond the Unemployment Rate: Assessing Canadian and U.S. Labour Markets Since the Great Recession," Bank of Canada Review, Bank of Canada, vol. 2014(Spring), pages 42-53.
    3. Frédérick Demers, 2003. "The Canadian Phillips Curve and Regime Shifting," Staff Working Papers 03-32, Bank of Canada.
    4. Robinson, Peter M, 1988. "Root- N-Consistent Semiparametric Regression," Econometrica, Econometric Society, vol. 56(4), pages 931-954, July.
    5. Mr. Peter B. Clark & Mr. Douglas Laxton & David Rose, 1995. "Capacity Constraints, Inflation and the Transmission Mechanism: Forward-Looking Versus Myopic Policy Rules," IMF Working Papers 1995/075, International Monetary Fund.
    6. Dany Brouillette & James Ketcheson & Olena Kostyshyna & Jonathan Lachaine, 2017. "Wage Growth in Canada and the United States: Factors Behind Recent Weakness," Staff Analytical Notes 17-8, Bank of Canada.
    7. Renaud St-Cyr, 2018. "Non-linéarité de la courbe de Phillips : un survol de la littérature," Staff Analytical Notes 2018-3, Bank of Canada.
    8. Jean-François Fillion & André Léonard, 1997. "La courbe de Phillips au Canada : un examen de quelques hypothèses," Staff Working Papers 97-3, Bank of Canada.
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    Cited by:

    1. Rose Cunningham & Vikram Rai & Kristina Hess, 2019. "Exploring Wage Phillips Curves in Advanced Economies," Discussion Papers 2019-8, Bank of Canada.

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    More about this item

    Keywords

    Inflation and prices; Labour markets;

    JEL classification:

    • E - Macroeconomics and Monetary Economics
    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • J - Labor and Demographic Economics
    • J3 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs

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