Wage Growth and Inflation in Europe: A Puzzle?

41 Pages Posted: 6 Feb 2020

See all articles by Vizhdan Boranova

Vizhdan Boranova

International Monetary Fund (IMF)

Raju Huidrom

International Monetary Fund

Sylwia Barbara Nowak

International Monetary Fund (IMF)

Petia B. Topalova

International Monetary Fund (IMF)

Volodymyr Tulin

International Monetary Fund (IMF)

Richard Varghese

International Monetary Fund (IMF)

Date Written: December 2019

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.

Keywords: Unit labor cost, Employment, Real wages, Public sector wages, Economic conditions, Wages, inflation, passthrough, Europe, WP, wage growth, inflation expectation, core inflation, NMS

JEL Classification: E24, E31, E01, J3, E2, O4

Suggested Citation

Boranova, Vizhdan and Huidrom, Raju and Nowak, Sylwia Barbara and Topalova, Petia B. and Tulin, Volodymyr and Varghese, Richard, Wage Growth and Inflation in Europe: A Puzzle? (December 2019). IMF Working Paper No. 19/280, Available at SSRN: https://ssrn.com/abstract=3533123

Vizhdan Boranova (Contact Author)

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

Raju Huidrom

International Monetary Fund ( email )

Sylwia Barbara Nowak

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

Petia B. Topalova

International Monetary Fund (IMF) ( email )

700 19th Street N.W.
Washington, DC 20431
United States

Volodymyr Tulin

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

Richard Varghese

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

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