Households' Wage Growth Expectations Formation: The Linkage with Price Inflation Expectations

This paper quantitatively investigates how closely Japanese households' wage growth expectations are linked with their price inflation expectations, using microdata from Japanese household surveys. The estimation results reveal that the linkage between wage growth expectations and price inflation expectations has strengthened in recent years. We further find that heterogeneity in the degree of linkage across households is statistically significantly related to the labor market conditions of individual households - such as labor market tightness and labor mobility - as well as their income levels and labor union membership status. Japan's labor market has been experiencing a gradual shrinking of the room for additional labor supply partly due to population aging. Such structural factors may have contributed to the recent strengthening of the linkage. This paper also examines how the strengthening of the linkage affects households' spending attitudes. We find that households with a stronger link tend to maintain relatively stronger spending attitudes even during periods of rising prices, as their expected real income declines are more limited. These findings suggest the importance of wage growth expectations being appropriately linked to price inflation expectations for sustaining consumption and achieving sustainable economic growth.