Do Higher Wages Cause Inflation?

48 Pages Posted: 5 Jun 2006

See all articles by Magnus Jonsson

Magnus Jonsson

Sveriges Riksbank

Stefan Palmqvist

affiliation not provided to SSRN

Date Written: June 2006


Much empirical evidence suggests that wage increases do not lead to inflation. This paper demonstrates that a 2-sector dynamic general equilibrium model calibrated to the U.S. economy is able to explain this evidence. We quantify the effect of an increased wage-markup on the inflation rate in both the goods sector and the service sector. The mechanisms we emphasize and quantify are changes in relative prices and monetary policy. We find that our model is successful in explaining the empirical evidence. Quantitatively, the relative price effect is more important than monetary policy in mitigating the effect of higher wage-markups.

Keywords: Wage-markups, relative prices, monetary policy

JEL Classification: D43, E31, E52

Suggested Citation

Jonsson, Magnus and Palmqvist, Stefan, Do Higher Wages Cause Inflation? (June 2006). Riksbank Research Paper No. 4, Available at SSRN: or

Magnus Jonsson (Contact Author)

Sveriges Riksbank ( email )

Brunkebergstorg 11
SE-103 37 Stockholm


Stefan Palmqvist

affiliation not provided to SSRN

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