Elena Bobeica, Matteo Ciccarelli, Isabel Vansteenkiste, 04 April 2022

The recent inflation increase across advanced economies has rekindled a debate about the risk of wage–price spirals. This column looks at pass-through from labour cost to price inflation for the US and euro area countries, and finds that the risk is state dependent. Wage–price spirals are less likely with low inflation and anchored expectations. The pass-through is also shock-dependent, being larger with demand shocks. Finally, the degree of pass-through is linked to secular trends mostly outside the control of central banks.

Alex Domash, Lawrence H. Summers, 17 March 2022

Since the beginning of the pandemic, labour market indicators have been sending different signals about the degree of slack in the US labour market. This column uses time-series and cross-section data to show that firm-side unemployment – a measure that ties together the unemployment rate with the vacancy and quits rate – predicts wage inflation better than the unemployment rate or the employment ratio, and that firm-side unemployment currently experienced in the US corresponds to a degree of tightness previously associated with sub 2% unemployment. The findings suggest that labour markets in the US are extremely tight and will likely contribute to inflationary pressures for some time to come. 

Jennifer Castle, David Hendry, 13 January 2014

During the Great Recession, UK real wages have fallen rather than the usual unemployment reaction. Nevertheless, this column argues that a structural break in the wage inflation/unemployment trade-off has not occurred. There has been a constant relationship between real wages and productivity since 1860. The key to the constancy is to the joint modelling of dynamics, location shifts, relevant variables and non-linearities.

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