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U.S. wage-price dynamics, before, during and after COVID-19, through the lens of an empirical econometric model

Author

Listed:
  • Bårdsen, Gunnar

    (NTNU – Norges teknisk-naturvitenskapelige universitet)

  • Nymoen, Ragnar

    (Dept. of Economics, University of Oslo)

Abstract

We specify an empirical model of US inflation which has the dynamics of wage and price setting at its core. In the dynamic wage equation an equilibrium-correction term connects the wage level to industrial prosperity indicators. In that way, the role of wage setting in the dynamics of the functional income distribution and in the rent-sharing processes becomes clearer than with a wage Phillips curve. At the same time, it does not exclude such explanatory variables that are typically found in empirical U.S. wage Phillips curves: changes in costs-of-living and indicators of labour market tightness, On the price side of the wage-price spiral, the empirical model includes an import price index and the price of oil. Existing studies of pandemic-era inflation have confirmed that shocks to energy prices were important, but have not included imported inflation more broadly. Estimation and simulation results indicate that wage growth was strongly affected early in the pandemic, but without breaking the long-run mean of wage growth. The strong rise in the price index of private consumption expenditure that started in 2021 therefore had a background in an increased wage level, but was dependent on other factors to evolve as it did: Namely a strong and broad increase in international prices, and in energy prices in particular.

Suggested Citation

  • Bårdsen, Gunnar & Nymoen, Ragnar, 2024. "U.S. wage-price dynamics, before, during and after COVID-19, through the lens of an empirical econometric model," Memorandum 1/2024, Oslo University, Department of Economics.
    • Handle: RePEc:hhs:osloec:2024_001
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    References listed on IDEAS

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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
    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
    • C54 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Quantitative Policy Modeling
    • E17 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Forecasting and Simulation: Models and Applications
    • E27 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Forecasting and Simulation: Models and Applications
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E37 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Forecasting and Simulation: Models and Applications
    • E65 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Studies of Particular Policy Episodes

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