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Labour market and inflation relationship indicator

Author

Listed:
  • Evgeny Postnikov

    (Bank of Russia, Russian Federation)

  • Dmitry Orlov

    (Bank of Russia, Russian Federation)

Abstract

The labour market is closely connected to inflation processes, and is therefore a key factor to consider in monetary policy decisions. Russian regions differ substantially in terms of employment, wages, migration flows and the age structure of their population. Therefore, the effects of regional changes in the labour market on prices may be different. Since the Central bank’s inflation targeting policy is pursued nationwide, it is important for a regulator to factor in regional heterogeneity when assessing the impact of changes in the labour market on inflation growth. This paper brings forward a composite indicator of the contribution of labour market changes to inflation increase – the Labour Market Indicator (LMI). To capture regional heterogeneity in terms of market labour indicators, regions are grouped into four clusters with different social, demographic and economic characteristics. We make the case that the impact of unemployment on inflation can be described as slight or moderate in Russia. The calculated quarterly LMI values are overall consistent with the actual effect of the labour market on inflation processes over the entire time horizon under study, which suggests that the estimates are reliable. The important benefit of the LMI is that it is possible to interpret and allows to assess the future impact of labour market on inflation one quarter ahead of available statistical data – which helps make better informed monetary policy decisions.

Suggested Citation

  • Evgeny Postnikov & Dmitry Orlov, 2022. "Labour market and inflation relationship indicator," Bank of Russia Working Paper Series wps96, Bank of Russia.
    • Handle: RePEc:bkr:wpaper:wps96
    as

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    References listed on IDEAS

    as
    1. Гафаров Булат Наилевич, 2011. "Кривая Филлипса И Становление Рынка Труда В России," Higher School of Economics Economic Journal Экономический журнал Высшей школы экономики, CyberLeninka;Федеральное государственное автономное образовательное учреждение высшего образования «Национальный исследовательский университет «Высшая школа экономики», vol. 15(2), pages 155-176.
    2. Francesco Furlanetto & Orjan Robstad, 2019. "Immigration and the macroeconomy: some new empirical evidence," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 34, pages 1-19, October.
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    Keywords

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    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • C38 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Classification Methdos; Cluster Analysis; Principal Components; Factor Analysis
    • 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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