Can an Ageing Workforce Explain Low Inflation?
24 Pages Posted: 23 Mar 2019
Date Written: March 20, 2019
Why is wage inflation so weak in spite of the recent sharp reduction in unemployment? We show that this may be due to an ongoing change in the composition of the labor supply. Indeed, the participation rate of workers aged between 55 and 64 has increased steadily over the last decade, from a third to above a half on average across OECD countries. This is most likely the consequence of ageing and the reform of pensions. We show that the participation rate of workers aged 55 to 64 contributes to explain why wage inflation has remained weak over the last five years. Our second result is that Phillips curves are alive and well. When exploiting the cross-country variance of the data, wage inflation remains highly responsive to domestic unemployment rates, including after the Great Recession.
Keywords: Low Inflation, Ageing Economy, Phillips Curve
JEL Classification: E5, J3
Suggested Citation: Suggested Citation