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Wage Growth and Inflation in Europe: A Puzzle?

Author

Listed:
  • Vizhdan Boranova
  • Raju Huidrom
  • Sylwia Nowak
  • Petia Topalova
  • Mr. Volodymyr Tulin
  • Mr. Richard Varghese

Abstract

Wages have been rising faster than productivity in many European countries for the past few years, yet signs of underlying consumer price pressures remain limited. To shed light on this puzzle, this paper examines the historical link between wage growth and inflation in Europe and factors that influence the strength of the passthrough from labor costs to prices. Historically, wage growth has led to higher inflation, but the impact has weakened since 2009. Empirical analysis suggests that the passthrough from wage growth to inflation is significantly lower in periods of subdued inflation and inflation expectations, greater competitive pressures, and robust corporate profitability. Thus the recent pickup in wage growth is likely to have a more muted impact on inflation than in the past.

Suggested Citation

  • Vizhdan Boranova & Raju Huidrom & Sylwia Nowak & Petia Topalova & Mr. Volodymyr Tulin & Mr. Richard Varghese, 2019. "Wage Growth and Inflation in Europe: A Puzzle?," IMF Working Papers 2019/280, International Monetary Fund.
    • Handle: RePEc:imf:imfwpa:2019/280
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    Cited by:

    1. Christian P Pinshi, 2022. "Ciblage des prévisions d'inflation : Un nouveau cadre pour la politique monétaire ?," Working Papers hal-03548273, HAL.
    2. Ms. Enrica Detragiache & Mr. Christian H Ebeke & La-Bhus Fah Jirasavetakul & Koralai Kirabaeva & Mr. Davide Malacrino & Florian Misch & Mr. Hyun Park & Ms. Yu Shi, 2020. "A European Minimum Wage: Implications for Poverty and Macroeconomic Imbalances," IMF Working Papers 2020/059, International Monetary Fund.
    3. Gabriel Felbermayr & Benjamin Bittschi & Josef Baumgartner, 2023. "Kollektivvertragsverhandlungen in Zeiten hoher Inflation," WIFO Monatsberichte (monthly reports), WIFO, vol. 96(9), pages 613-632, September.
    4. Hahn, Elke, 2020. "The wage-price pass-through in the euro area: does the growth regime matter?," Working Paper Series 2485, European Central Bank.
    5. Wifo, 2023. "WIFO-Monatsberichte, Heft 9/2023," WIFO Monatsberichte (monthly reports), WIFO, vol. 96(9), September.
    6. PINSHI, Christian P., 2022. "Inflation-Forecast Targeting: A New Framework for Monetary Policy?," MPRA Paper 111709, University Library of Munich, Germany.
    7. Koester, Gerrit & Lis, Eliza & Nickel, Christiane & Osbat, Chiara & Smets, Frank, 2021. "Understanding low inflation in the euro area from 2013 to 2019: cyclical and structural drivers," Occasional Paper Series 280, European Central Bank.

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    More about this item

    Keywords

    WP; wage growth; inflation expectation; Wages; inflation; passthrough; Europe; Passthrough ratio; wage-inflation passthrough; firms' profitability; Labor costs; Producer prices; Wage adjustments; Global;
    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
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation

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