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Microfoundations of the Wage Inflation in the Czech Republic

Author

Listed:
  • Kamil Galuscak
  • Daniel Munich

Abstract

We investigate whether microfoundations might increase the predictive power of macroeconomic models of wage inflation. By comparing past predictions to observed values, we find that the Phillips curve with the average unemployment rate in districts with prevalently low unemployment rates delivers more accurate predictions of aggregated wage inflation than the Phillips curve with the overall unemployment rate. The identification of specific groups of districts is based on our estimates of the wage curve at the regional level, i.e. the relationship between the regional level of wages and regional unemployment. Real wages adjust to changes in local unemployment in districts with low unemployment rates, a low share of public sector employment, and for the short-term unemployed. On the other hand, the welfare system might represent a floor preventing downward wage adjustments in districts with high unemployment rates and for the long-term unemployed. In the public sector, wages are negotiated at the economy-wide level, while the variance in regional unemployment does not play a role.

Suggested Citation

  • Kamil Galuscak & Daniel Munich, 2003. "Microfoundations of the Wage Inflation in the Czech Republic," Working Papers 2003/01, Czech National Bank.
    • Handle: RePEc:cnb:wpaper:2003/01
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    File URL: https://www.cnb.cz/export/sites/cnb/en/economic-research/.galleries/research_publications/cnb_wp/wp1-2003.pdf
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    References listed on IDEAS

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    Cited by:

    1. Jurajda, Štepán & Terrell, Katherine, 2007. "Regional Unemployment and Human Capital in Transition Economies," IZA Discussion Papers 3176, Institute of Labor Economics (IZA).
    2. David G. Blanchflower & Andrew J. Oswald, 2005. "The Wage Curve Reloaded," NBER Working Papers 11338, National Bureau of Economic Research, Inc.
    3. Michal Franta, 2008. "Time Aggregation Bias in Discrete Time Models of Aggregate Duration Data," Working Papers 2008/10, Czech National Bank.
    4. International Monetary Fund, 2005. "Wage Flexibility in Turbulent Times: A Practitioner’s Guide, with an Application to Poland," IMF Working Papers 2005/134, International Monetary Fund.
    5. Van Poeck Andrè & Veiner Maret & Plasmans Joseph, 2007. "Wage flexibility in the new European Union members: How different form the “old” members?," wp.comunite 0006, Department of Communication, University of Teramo.

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    More about this item

    Keywords

    Panel data; partial adjustment model; Phillips curve; unemployment; wage curve.;
    All these keywords.

    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
    • J64 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment: Models, Duration, Incidence, and Job Search
    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials
    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models

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