The Changing Link between Labor Cost and Price Inflation in the United States

37 Pages Posted: 10 Aug 2021

See all articles by Elena Bobeica

Elena Bobeica

European Central Bank (ECB)

Matteo Ciccarelli

European Central Bank (ECB)

Isabel Vansteenkiste

European Central Bank (ECB)

Date Written: August, 2021

Abstract

The link between US labor cost and price inflation has weakened notably over the past three decades. In this paper we document this decline and analyse potential contributing factors. We consider four important trends that have shaped the US economy of late: (i) improved anchoring of inflation expectations; (ii) the changing constellation of shocks hitting the economy; (iii) increased trade integration and (iv) rising firm market power. We find that the improved anchoring of inflation expectations has played a particularly relevant role but also that the latter two trends offer promising avenues to understand the decline in pass-through from labor cost to price inflation. Our results also bring supportive evidence to the view taken by the FED in the context of its monetary policy strategy review that a robust job market can be sustained without causing an outbreak of inflation.

JEL Classification: C32, E24, E31

Suggested Citation

Bobeica, Elena and Ciccarelli, Matteo and Vansteenkiste, Isabel, The Changing Link between Labor Cost and Price Inflation in the United States (August, 2021). ECB Working Paper No. 2021/2583, Available at SSRN: https://ssrn.com/abstract=3902304 or http://dx.doi.org/10.2139/ssrn.3902304

Elena Bobeica (Contact Author)

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Matteo Ciccarelli

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Isabel Vansteenkiste

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
189
Abstract Views
473
rank
221,237
PlumX Metrics