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Inflation Dynamics and the Labour Share in the UK

  • Nicoletta Batini
  • Brian Jackson
  • Stephen Nickell

In recent years UK real wages have been growing faster than labour factor productivity, implying that the labour share has been rising. This paper looks at various definitions of the labour share and derives a measure for the UK, which appears positively correlated with the growth rate of the UK gross value added price deflator. Following Layard, Nickell and Jackman (1991), we investigate the relationship between inflation and the share more formally by estimating a pricing equation or “new Phillips curve” obtained from a structural dynamic model of price setting based on Rotemberg (1982) and extended to capture employment adjustment costs and the openness of the UK economy. This model nests the Sbordone (1998) and Gali, Gertler and Lopez-Salido (2000) relationship between inflation and marginal costs in the limiting case of a constant equilibrium mark-up and no employment adjustment costs. Our findings suggest that there is a stable ceteris paribus relationship between inflation and the labour share over the last 30 years in the UK and so the share contains information that helps to predict inflation.

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Paper provided by Monetary Policy Committee Unit, Bank of England in its series Discussion Papers with number 02.

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Date of creation: 2000
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Handle: RePEc:mpc:wpaper:02
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  1. Henley, Andrew, 1987. "Labour's Shares and Profitability Crisis in the U.S.: Recent Experience and Post-war Trends," Cambridge Journal of Economics, Oxford University Press, vol. 11(4), pages 315-30, December.
  2. Bentolila, Samuel & Saint-Paul, Gilles, 1998. "Explaining Movements in the Labour Share," CEPR Discussion Papers 1958, C.E.P.R. Discussion Papers.
  3. Galí, Jordi & Gertler, Mark & López-Salido, J David, 2001. "European Inflation Dynamics," CEPR Discussion Papers 2684, C.E.P.R. Discussion Papers.
  4. Edward J Green & Robert H Porter, 1997. "Noncooperative Collusion Under Imperfect Price Information," Levine's Working Paper Archive 1147, David K. Levine.
  5. Caballero, Ricardo J. & Hammour, Mohamad L., 1998. "Jobless growth: appropriability, factor substitution, and unemployment," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 48(1), pages 51-94, June.
  6. Calvo, Guillermo A., 1983. "Staggered prices in a utility-maximizing framework," Journal of Monetary Economics, Elsevier, vol. 12(3), pages 383-398, September.
  7. Jacques R. Artus, 1984. "An Empirical Evaluation of the Disequilibrium Real Wage Rate Hypothesis," NBER Working Papers 1404, National Bureau of Economic Research, Inc.
  8. Michael Dotsey & Robert G. King & Alexander L. Wolman, 1999. "State-Dependent Pricing and the General Equilibrium Dynamics of Money and Output," The Quarterly Journal of Economics, Oxford University Press, vol. 114(2), pages 655-690.
  9. Kang, Joo-Hoon & Jeong, Ugyeong & Bae, Joo-Han, 1998. "Cyclicality of markups and real wages in Korea," Economics Letters, Elsevier, vol. 60(3), pages 343-349, September.
  10. Olivier Blanchard, 1998. "Revisiting European Unemployment: Unemployment, Capital Accumulation, and Factor Prices," NBER Working Papers 6566, National Bureau of Economic Research, Inc.
  11. Roberts, John M, 1995. "New Keynesian Economics and the Phillips Curve," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 27(4), pages 975-84, November.
  12. Rotemberg, Julio J, 1982. "Sticky Prices in the United States," Journal of Political Economy, University of Chicago Press, vol. 90(6), pages 1187-1211, December.
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