Wage Growth and Inflation in Europe: A Puzzle?

By Vizhdan Boranova, Raju Huidrom, Sylwia Nowak, Petia Topalova, Volodymyr Tulin, Richard Varghese

December 20, 2019

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Format: Chicago

Vizhdan Boranova, Raju Huidrom, Sylwia Nowak, Petia Topalova, Volodymyr Tulin, and Richard Varghese. Wage Growth and Inflation in Europe: A Puzzle?, (USA: International Monetary Fund, 2019) accessed December 26, 2024

Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Summary

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.

Subject: Inflation, Labor, Labor costs, Prices, Producer prices, Wage adjustments, Wages

Keywords: Europe, Firms' profitability, Global, Inflation, Inflation expectation, Labor costs, Passthrough, Passthrough ratio, Producer prices, Wage adjustments, Wage growth, Wage-inflation passthrough, Wages, WP

Publication Details

Pages:

40
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2019/280
Stock No:

WPIEA2019280
ISBN:

9781513521275
ISSN:

1018-5941

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