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Wage and Price Inflation: An Industry-Level Study

Author

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  • Shira Buzaglo-Baris

    (Bank of Israel)

Abstract

This paper investigates the effect of wage inflation on price inflation and vice versa, using industry-level data from Israel for identification. Various methodologies are employed to evaluate the wage inflationary effect, which yield consistent estimates of the pass-through from wage to price inflation. The findings suggest that a 10% increase in monthly wages is associated with a 1%-3% cumulative rise in prices a year ahead, an effect that gradually decreases in the following months. The analysis is extended to include the reversed effect of headline inflation on wages, thereby completing the wageprice spiral perspective. I find that within a year wages slowly adjust to catch up with an inflation shock. Lastly, the paper presents some evidence of a stronger relationship during the aftermath of the COVID-19 pandemic, albeit with considerable uncertainty. To a certain degree, the results indicate that labor market inflationary pressures may be higher than previously thought.

Suggested Citation

  • Shira Buzaglo-Baris, 2024. "Wage and Price Inflation: An Industry-Level Study," Bank of Israel Working Papers 2024.09, Bank of Israel.
    • Handle: RePEc:boi:wpaper:2024.09
    as

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    References listed on IDEAS

    as
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    Keywords

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    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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