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---

### Executive summary
- Overview:
  - The 2022-23 inflation surge produced the most significant rise in wages across Europe in decades; nominal wage growth remained above pre-pandemic averages even as inflation declined from its 2023 peak, and the "new global energy supply shock unfolding in 2026" raises risks of renewed wage pressures.
  - Approach: hybrid Phillips curve at the macro level for 26 European countries over 2006–2024; micro-level analysis of collective bargaining agreements in Spain; local projections to assess aggregate spillovers from minimum and public sector wage policies.
- Macro-level headline findings:
  - CESEE — "past inflation being the dominant driver of nominal wage growth."
  - AEs — "inflation expectations playing a more prominent role."
  - The slope of the wage Phillips curve has not materially changed since the pandemic — labor market slack has consistently restrained wage growth throughout.
  - Nominal wage growth is higher for any given level of labor market slack when inflation is elevated; evidence that wage sensitivity to past inflation increased post-pandemic.
  - Rolling estimates and structural break tests point to "a significant increase in the sensitivity of wages to past inflation after 2020 in both AEs and CESEE."
  - Model-based projections systematically underpredicted post-pandemic wage growth in both AEs and CESEE.
- Micro-level and policy spillovers (summary):
  - Spain case study confirms past inflation raises negotiated wage growth and labor market slack lowers it.
  - Institutional amplifiers: CPI indexation clauses, shorter agreement duration (annual), above-the-firm bargaining, and labor market tightness raise inflation pass-through to negotiated wages.
  - Minimum wage hikes have modest and short-lived effects overall; pass-through has strengthened markedly in CESEE since 2015 while broadly stable in AEs.
  - Public sector wage shocks have sizable and persistent spillovers to private wages, more front-loaded in AEs and more gradual in CESEE.
- Policy implications:
  - Institutional mechanisms that supported the post-2022 wage pickup — indexation, sector-level bargaining, discretionary minimum and public wage hikes — "could trigger a stronger price-wage inflation loop, leading to greater inflation persistence."
  - Labor market slack still moderates wage growth even when inflation is elevated.
  - A more persistent inflation shock and/or stronger price/wage inflation loops might require significantly tighter macroeconomic policies to bring inflation back to central bank targets.

### Empirical framework and data
- Macro framework:
  - Two-step estimation (2006Q1–2024Q4 for the macro panel of 26 countries):
    - Step 1: estimate long-run cointegrating equation for real wages ln(w_i,t / p_i,t) = γ_1,i + γ_2,i ln g_i,t + γ_3,i τ_t + ε_i,t.
      - γ_2,i averages 0.51 across the sample.
      - γ_3,i close to 0 for most countries.
    - Step 2: short-run nominal wage Phillips curve:
      - Δw_i,t = α_i + Σ_{l=1}^4 β_{1,l} π_{i,t−l}^4 + β_2 E_t[π_{i,t+1}] + β_3 EC_i,t−1 + β_4 u_i,t + β_5 Δg_i,t + β_6 Δh_i,t + ε_i,t.
  - Key pooled/full-sample quantified effects:
    - Unemployment gap: a 1 percentage-point rise in unemployment above its HP-filtered trend → −1.2 percentage-point decline in wage inflation across the full sample.
    - Past (lagged cumulative) inflation: a 1 percentage-point increase → 0.3 percentage-point increase in wage growth.
  - AE vs CESEE contrasts:
    - CESEE: higher sensitivity to labor market slack; past inflation stronger driver; inflation expectations not significant.
    - AE: inflation expectations significant; lower backward-looking pass-through than CESEE.
  - Negotiated wages vs wage drift decomposition (nine AEs: Austria, Belgium, Finland, France, Germany, Italy, Netherlands, Spain, Sweden):
    - Aggregate nominal wage growth = negotiated wages + wage drift.
    - Wage drift responded first after 2022-23; negotiated wages rose as contracts renewed from 2023 onward.
    - In 2021–22, wage drift contributed an average of 3 percentage points to annual nominal wage growth in AEs (text truncated beyond this point in source).

- Micro (Spain) dataset and setup:
  - Comprehensive Spain dataset: all collective bargaining agreements registered between 2013Q1 and 2025Q2; sample size about 21,000 agreements.
  - Agreement-level variables include presence of inflation indexation clauses, duration (annual vs multiannual), level of bargaining (firm-level vs above-firm), log number of workers, log number of firms covered.
  - Regional macro controls from INE: lagged quarterly inflation (q/q annualized) and unemployment gap.
  - Baseline micro specification (equation (5)):
    - 푤̂푖푠푟푡 = 훼푖푠푟 + ∑(훽1,푙 휋푟,푡−푙)_{l=1..4} + ∑(훽2,푙 휋푟,푡−푙 × 퐗푖푠푟푡)_{l=1..4} + 훾 푢푟푡 + 훿1 퐗푖푠푟푡 + 훿2 퐙푖푠푟푡 + 휑푠푟 + 휀푖푠푟푡.

### Macro-level empirical findings (selected quantified results)
- Benchmark wage Phillips estimates (All / AE / CESEE; dependent: wage growth, q/q annualized; sample 2006Q1–2024Q4):
  - Lagged inflation (sum): 0.309** (All; (0.120)), 0.256** (AE; (0.0918)), 0.406* (CESEE; (0.182)).
  - Inflation expectations: 1.358 (All; (0.918)), 1.998** (AE; (0.879)), 0.801 (CESEE; (1.347)).
  - Wage catch up (error correction): −0.246*** (All; (0.078)), −0.152** (AE; (0.065)), −0.272** (CESEE; (0.094)).
  - Unemployment gap: −1.156*** (All; (0.372)), −0.298** (AE; (0.104)), −1.666*** (CESEE; (0.522)).
  - Labor productivity growth: 0.495*** (All; (0.164)), 0.213* (AE; (0.116)), 0.766*** (CESEE; (0.210)).
- Out-of-sample projection gaps (pre-pandemic parameters applied post-2019):
  - Gap averages 3.4 percentage points in AEs between 2022 and 2024.
  - Gap reaches 8.5 percentage points in CESEE over the same period.
- Negotiated wages vs wage drift (9-country AE panel, 2006Q1–2024Q4; observations 683):
  - Lagged inflation (sum): 0.368*** (Wage per employee; 0.0996), 0.363*** (Negotiated wages; 0.106), 0.005 (Wage drift; 0.0952).
  - Unemployment gap: −0.482* (Wage per employee; (0.254)), −0.223*** (Negotiated wages; (0.038)), −0.259 (Wage drift; (0.271)).
  - Labor productivity growth: 0.311*** (Wage per employee; (0.052)), −0.005 (Negotiated wages; (0.019)), 0.316*** (Wage drift; (0.068)).
  - Hours per employee growth: 0.236** (Wage per employee; (0.076)), 0.012 (Negotiated wages; (0.012)), 0.224** (Wage drift; (0.080)).

### Micro-level findings (Spain agreement-level results)
- Sample: ~21,000 agreements (2013Q1–2025Q2); median negotiated nominal increases:
  - ~1.5 percent annually between 2013 and 2019.
  - ~3.5 percent (median) by 2023.
  - ~3 percent by mid-2025.
- Indexation prevalence:
  - Approximately 30 percent of agreements contain indexation clauses.
  - About half of indexation clauses—around 15 percent of all agreements—are linked to the CPI.
  - Indexation rose from 27 percent (pre-COVID) to 31–33 percent in 2023–2024 (agreements basis).
  - CPI-based indexation increased from 15.6 percent to 21–22 percent (agreements basis).
  - Coverage-weighted shares: general indexation rose from 22 percent pre-COVID to a peak of 41 percent in 2023; CPI-based indexation rose from 15 percent to over 30 percent.
- Core micro estimates (baseline and robustness; dependent: agreed wage growth; observations ~9,399 in key tables):
  - Sum of Past Inflation: 0.10*** (spec 1; (0.01)) in simple specification.
  - Unemployment gap: −0.16*** across specifications (e.g., −0.16*** (0.00)).
  - CPI Indexation dummy: 0.35*** (spec 1; (0.04)).
  - Sector-level indicator: 0.27* (spec 1; (0.14)).
  - Ln(Affected Workers): 0.11*** (all specs; (0.02)).
  - Ln(Affected Firms): −0.09*** (all specs; (0.03)).
- Institutional interactions and magnitudes:
  - CPI indexation increases pass-through: interaction past inflation × CPI indexation = 0.08 in one specification; elsewhere CPI indexation raises sensitivity (text reports "indexation approximately doubles total inflation pass-through from 0.08 to 0.16" and an estimated effect: "0.4 percentage points for each 1 percentage point increase in inflation" in other summarized lines).
  - Sector-level bargaining interaction: interaction past inflation × sector-level = 0.10 (positive and significant).
  - Annual contract duration interaction: interaction past inflation × annual = 0.06; implied total impact under annual contracts = 0.06 + 0.09 = 0.15 percent versus 0.09 percent under multi-year contracts.
  - Agreement size: ln(number of workers) ≈ 0.11–0.12 (positive, highly significant).
  - ln(number of firms) ≈ −0.09 (negative, significant).
- Endogeneity and indexation adoption:
  - Higher past inflation materially increases the probability of CPI indexation (Table A.II.10: Sum of Past Inflation coefficients 0.004** to 0.006*** across specs).
  - Sector-level agreements are 5–7 percentage points less likely to include CPI indexation (summary statement).
- Labor market tightness interaction:
  - Full sample (2013–2025): interaction of past inflation × unemployment gap is material and statistically significant — tight labor markets amplify pass-through.
  - Pre-COVID (2013–2019): interaction essentially zero and statistically insignificant.

### Minimum wage spillovers (local projections)
- Empirical setup:
  - Outcome: Real compensation per worker (CPI-deflated).
  - Shock: Real statutory minimum wage per month.
  - Sample: 22 countries with statutory minimum wages; 2001H2–2024H2; semesterly; horizons up to 3 years (6 semesters).
- Full-sample and group findings:
  - Full sample: pass-through modest and short-lived; peak elasticity ≈ 0.15; impact significant up to one year (two semesters).
  - AEs: stronger and more persistent impact; elasticity rises over time and reaches ≈ 0.25 by end of year three.
  - CESEE: initial response slightly smaller, peaking ≈ 0.15 in the first semester, then declining and losing significance at longer horizons.
- Time-period decomposition:
  - Pre-2015 (1999H1–2014H2): full sample peak ≈ 0.11 concentrated in first six months; AEs peak ≈ 0.25 after three years; CESEE peak ≈ 0.1 in first semester.
  - Post-2014 (2015H1–2024H2): strengthening overall — full sample peak ≈ 0.28 at five semesters; CESEE peak ≈ 0.38 after eighteen months and persistent across horizons; AEs show no statistically significant change across sub-periods.
- Contribution to recent real wage growth (model starting 2015H1; cumulative since 2022H1 to 2024H2):
  - AE: ≈ 0.9 percentage point contribution to real wage growth (accounting for 53 percent of real cumulative wage growth).
  - CESEE: ≈ 1.1 percentage points (accounting for 13 percent of cumulative real wage growth).
- Tests for drivers of CESEE strengthening:
  - Interactions with minimum-to-median wage ratio (Kaitz index), union density, collective bargaining coverage yield no statistically significant associations; origins of CESEE strengthening remain difficult to pin down with aggregate cross-country data.

### Public sector wage spillovers (local projections)
- Empirical setup:
  - Outcome: Real private sector wages per hour.
  - Shock: Real public sector wages per hour (public administration, education, health).
  - Sample: 27 countries; 2004Q2–2024Q3; quarterly; horizons up to 3 years (12 quarters).
- Key impulse-response coefficients (Dln Pub Wage; AE vs CESEE; horizons h=0..12):
  - AEs: Dln Pub Wage coefficients (h=0..12): 0.451*** (h=0; (0.084)), 0.474*** (h=1; (0.115)), 0.497*** (h=2; (0.141)), 0.477*** (h=3; (0.165)), 0.487*** (h=4; (0.161)), 0.418*** (h=5; (0.149)), 0.446*** (h=6; (0.134)), 0.454*** (h=7; (0.153)), 0.290** (h=8; (0.132)), 0.314** (h=9; (0.130)), 0.374** (h=10; (0.135)), 0.375*** (h=11; (0.134)), 0.353** (h=12; (0.144)).
  - CESEE: Dln Pub Wage coefficients (h=0..12): 0.212*** (h=0; (0.063)), 0.268*** (h=1; (0.068)), 0.278*** (h=2; (0.066)), 0.271*** (h=3; (0.075)), 0.249*** (h=4; (0.076)), 0.273*** (h=5; (0.070)), 0.272*** (h=6; (0.062)), 0.297*** (h=7; (0.057)), 0.280*** (h=8; (0.054)), 0.338*** (h=9; (0.064)), 0.308*** (h=10; (0.056)), 0.317*** (h=11; (0.058)), 0.277*** (h=12; (0.076)).
- Interpretation:
  - Public sector wage shocks have sizable and persistent spillovers to private wages.
  - Spillovers are more front-loaded in AEs (larger immediate coefficients) and more gradual but persistent in CESEE.

### Institutional amplifiers and dynamics — synthesis
- Institutional features that amplify pass-through of past inflation to negotiated wages:
  - CPI indexation clauses — increase sensitivity and are endogenously more likely when past inflation is high.
  - Above-the-firm (sector-level) bargaining — strengthens pass-through and is associated with higher negotiated wage growth.
  - Annual (short) contract duration — increases pass-through relative to multi-year contracts (implied total impacts ~0.15 percent vs 0.09 percent per 1 percent inflation shock in reported specifications).
  - Labor market tightness — low unemployment amplifies pass-through; interaction effect material and significant in full sample (2013–2025) but not pre-COVID (2013–2019).
- Negotiated wages vs wage drift dynamics:
  - Negotiated wages: strict downward nominal rigidity over 2006–2025; never negative in sample.
  - Wage drift: fluctuates both directions; drove early post-pandemic wage response (2021–22) via discretionary raises and hours recovery, contributing about 3 percentage points to annual nominal wage growth in AEs in 2021–22 (truncated detail).
  - By 2023–24, negotiated wages rose as contracts renewed and wage drift moderated, with wage drift inflation coefficient reverting to approximately zero by end-2024.

### Policy implications and outlook (selective, text-exact framings)
- Risks:
  - Institutional mechanisms that supported the post-2022 wage pickup — indexation, sector-level bargaining, discretionary minimum and public wage hikes — "could trigger a stronger price-wage inflation loop, leading to greater inflation persistence."
  - "The reintroduction or strengthening of backward-looking indexation clauses in collective agreements could heighten the persistence of inflation."
  - Discretionary increases in minimum wages and public sector wages "may spill over into broader wage dynamics, with the potential to amplify inflationary pressures and necessitate tighter macroeconomic policy responses."
- Mitigating factors:
  - "Labor market slack still retains its moderating influence on wage growth even when inflation is elevated."
- Policy stance:
  - "A more persistent inflation shock and/or stronger price/wage inflation loops might require significantly tighter macroeconomic policies to bring inflation back to central bank targets."
- Monitoring recommendation (implied by textual synthesis):
  - Monitor indexation prevalence, bargaining-level composition (firm vs sector), contract duration distribution, and discretionary minimum/public wage policy timings given their potential to amplify second-round effects.

### Data notes and samples (concise)
- Macro sample: 26 European countries; 2006Q1–2024Q4 (panel).
- Negotiated wages country set: Austria, Belgium, Finland, France, Germany, Italy, the Netherlands, Spain, Sweden (quarterly negotiated wage data).
- Spain micro sample: agreements 2013Q1–2025Q2; ~21,000 agreements; ~9,399 observations in many regression specifications.
- Minimum wage local projections: 22 countries; 1999H1–2024H2 (analysis split pre-2015 vs post-2014); estimation sample for shocks 2001H2–2024H2 in one presentation.
- Public sector wage local projections: 27 countries; 2004Q2–2024Q3; horizons up to 12 quarters.

*Source: IMF Working Paper — Executive Summary and selected chapters/annexes (Wage Dynamics in Europe).*

### Executive Summary ......................................................................................................

### Executive Summary

### Overview
- The 2022-23 inflation surge produced the most significant rise in wages across Europe in decades; nominal wage growth remained above pre-pandemic averages even as inflation declined from its 2023 peak, and the "new global energy supply shock unfolding in 2026" raises risks of renewed wage pressures.
- The paper reexamines drivers of nominal wage growth across Europe, assesses potential shifts in wage-setting processes, and explores implications for the inflation outlook using:
  - A hybrid Phillips curve at the macro level for 26 European countries over 2006–2024.
  - A micro-level analysis of collective bargaining agreements in Spain.
  - Local projections to assess aggregate spillovers from minimum and public sector wage policies.

### Macro-level findings (AEs vs CESEE)
- Regional differences in wage formation:
  - CESEE — "past inflation being the dominant driver of nominal wage growth."
  - AEs — "inflation expectations playing a more prominent role."
- Labor market slack:
  - "The slope of the wage Phillips curve has not materially changed since the pandemic — labor market slack has consistently restrained wage growth throughout."
- Post-pandemic shift:
  - "Nominal wage growth is higher for any given level of labor market slack when inflation is elevated, with evidence that wage sensitivity to past inflation increased post-pandemic."
  - Model-based projections systematically underpredicted post-pandemic wage growth in both AEs and CESEE.
  - Rolling estimates and structural break tests point to "a significant increase in the sensitivity of wages to past inflation after 2020 in both AEs and CESEE."
- Decomposition in AEs (aggregate wages into negotiated wages and wage drift):
  - Sequential response after the 2022-23 inflation surge:
    - Initial predominance of wage drift increases as employers granted discretionary pay rises ahead of formal negotiations.
    - From 2023 onward, negotiated wages rose as contracts were renewed and workers recouped accumulated real wage losses.

### Micro-level findings: Spain (collective bargaining)
- Data and setting:
  - Spain provides a "useful case study" given "high bargaining coverage, predominance of above-the-firm level (sector- and region-level) bargaining, rich variation across agreements, and the sharpness of the 2022-23 inflation shock."
- Core empirical results:
  - "Past inflation raises negotiated wage growth and labor market slack lowers it," confirming Phillips-curve forces at the agreement level.
- Institutional amplifiers of inflation pass-through:
  - CPI indexation clauses increase pass-through of inflation to negotiated wages.
  - Shorter agreement duration (annual rather than multi-annual) amplifies pass-through.
  - Above-the-firm (sector-level) bargaining amplifies pass-through.
  - Labor market tightness amplifies the pass-through of past inflation to wages, "especially after the pandemic."
- Institutional change after high inflation:
  - "The prevalence of indexed agreements rose sharply during the 2022-23 inflation episode," though remaining "far below the highs of the 1990s and 2000s."
  - Agreement-level analysis finds that "a high-inflation episode significantly increases the likelihood that formal indexation be subsequently introduced."

### Minimum and public wage spillovers
- Minimum wages:
  - In the full sample, "minimum wage hikes have a modest and short-lived effect on overall wages."
  - Since 2015, "the pass-through has strengthened markedly in CESEE while remaining broadly stable in AEs."
  - The analysis could not "strictly pin down the precise mechanism(s) at play": no statistically significant association between pass-through and the minimum-to-median wage ratio, union density, or collective bargaining coverage was found.
- Public sector wages:
  - "Public sector wage shocks have sizable and persistent spillovers to private wages, which are more front-loaded in AEs and more gradual in CESEE."
  - During 2022-24, "public wage policies are found to have acted as a modest stabilizer in AEs but an amplifier in CESEE."

### Implications for policy and outlook
- Risks from institutional mechanisms:
  - Institutional mechanisms that supported the post-2022 wage pickup — indexation, sector-level bargaining, discretionary minimum and public wage hikes — "could trigger a stronger price-wage inflation loop, leading to greater inflation persistence."
  - "The reintroduction or strengthening of backward-looking indexation clauses in collective agreements could heighten the persistence of inflation."
  - Discretionary increases in minimum wages and public sector wages "may spill over into broader wage dynamics, with the potential to amplify inflationary pressures and necessitate tighter macroeconomic policy responses."
- Labor market slack retains moderating role:
  - "Labor market slack still retains its moderating influence on wage growth even when inflation is elevated."
- Policy stance:
  - "A more persistent inflation shock and/or stronger price/wage inflation loops might require significantly tighter macroeconomic policies to bring inflation back to central bank targets."

### Analytical scope and structure
- Sample and methods:
  - Macro analysis covers 26 European countries over 2006–2024, estimating a hybrid wage Phillips curve for AEs and CESEE and decomposing AEs’ aggregate wages into negotiated wages and wage drift.
  - Micro analysis uses a comprehensive agreement-level dataset of collective bargaining outcomes in Spain.
  - Spillover analysis uses local projections to estimate effects of minimum and public sector real wage shocks to average and private sector real wages.
- Organization of the paper:
  - Section II — macro-level wage Phillips curves (AEs and CESEE) and decomposition for AEs.
  - Section III — micro-level Phillips curve and institutional features in Spain.
  - Section IV — spillover effects of minimum and public sector wage policies.
  - Section V — conclusions.

*Source: IMF Working Paper — Executive Summary (Wage Dynamics in Europe).*

### 1. Empirical Framework

### 1. Empirical Framework

### Framework overview
- Analysis starts from the wage Phillips curve, a hybrid specification augmented with an error correction term to account for deviations of real wages from their long-run equilibrium (captured by a simple trend).
- Estimation proceeds in two steps:
  - Step 1: estimate the long-run (cointegrating) equation for real wages.
  - Step 2: use residuals from the cointegrating regression as the error-correction term in the short-run nominal wage equation.
- The dependent variable in the long-run equation is real wages; the Phillips curve is estimated on nominal wage growth.
- Robustness checks: long-run relationship re-estimated using Dynamic OLS (Stock and Watson 1993) and a one-step ARDL bounds-testing approach (Pesaran, Shin, and Smith 2001). Short-term wage-coefficient estimates are broadly similar across these specifications.

### Long-run cointegrating equation
- Specification (estimated by OLS for each country i and quarter t):
  - ln(w_i,t / p_i,t) = γ_1,i + γ_2,i ln g_i,t + γ_3,i τ_t + ε_i,t
    - where w_i,t / p_i,t is real wage (nominal wage per employee deflated by the CPI),
    - g_i,t is the level of real labor productivity,
    - τ_t is a linear time trend,
    - ε_i,t is the residual (deviation of actual real wages from productivity-consistent equilibrium).
- Parameters γ_1,i, γ_2,i, γ_3,i are estimated separately for each country to allow heterogeneity in long-run elasticity and trend.
- First-stage results (summary):
  - γ_2,i (elasticity of real wages to productivity) is positive and statistically significant in the majority of countries, averaging 0.51 across the sample.
  - γ_3,i (time trend) is economically negligible, close to 0 for most countries.
- Interpretation of residuals ε_i,t:
  - Positive ε_i,t: real wages exceed productivity-consistent level → downward pressure on future wage growth.
  - Negative ε_i,t: real wages below productivity-consistent level → incentives for wage catch-up (noted as large and widespread after the 2022-23 inflation surge).

### Short-run wage Phillips curve (second step)
- Estimated by OLS on the panel of 26 countries (separately for AE and CESEE) with country fixed effects and standard errors clustered at the country level.
- Short-run specification:
  - Δw_i,t = α_i + Σ_{l=1}^4 β_{1,l} π_{i,t−l}^4 + β_2 E_t[π_{i,t+1}] + β_3 EC_i,t−1 + β_4 u_i,t + β_5 Δg_i,t + β_6 Δh_i,t + ε_i,t
    - Δw_i,t: quarter-on-quarter annualized nominal wage growth (wage per employee).
    - Σ_{l=1}^4 β_{1,l} π_{i,t−l}^4: cumulative effect of four lags of quarter-on-quarter annualized headline inflation.
    - E_t[π_{i,t+1}]: two-year-ahead Consensus inflation forecast.
    - EC_i,t−1: lagged error correction term (residuals from long-run equation), expected negative coefficient β_3.
    - u_i,t: unemployment gap (deviation of actual unemployment rate from its HP-filtered trend, using smoothing parameter 1,600 for quarterly data).
    - Δg_i,t: real labor productivity growth.
    - Δh_i,t: hours-per-employee growth (controls mechanical effect of working time on wage per employee).

### Estimation sample and main quantified findings
- Sample period: 2006Q1–2024Q4.
- Full panel: 26 European countries; results also reported separately for Advanced Economies (AE) and Central, Eastern, and Southeastern European Economies (CESEE).
- Key estimated effects (pooled/full-sample results and magnitudes):
  - Unemployment gap: a 1 percentage-point rise in unemployment above its HP-filtered trend is associated with a -1.2 percentage-point decline in wage inflation across the full sample.
  - Past (lagged cumulative) inflation: a 1 percentage-point increase in the cumulative sum of lagged inflation is associated with a 0.3 percentage-point increase in wage growth.
  - Error correction term and labor productivity growth: statistically significant contributors to wage dynamics in pooled estimates.
  - Inflation expectations: not statistically significant in the pooled specification (regains significance in AE panel).

### Differences between AEs and CESEE (estimation by country group)
- CESEE versus AE contrasts:
  - Labor market slack sensitivity: CESEE exhibits markedly higher sensitivity of nominal wage growth to labor market slack.
  - Inflation pass-through:
    - Past inflation is a stronger driver of nominal wage growth in CESEE than in AEs.
    - Inflation expectations are statistically significant in AEs but not found to independently shape wage outcomes in CESEE.
  - CESEE also shows stronger sensitivity of nominal wage growth to labor productivity and to the error correction term — consistent with structural convergence dynamics.
- Interpretation and implications:
  - CESEE displays a more backward-looking wage formation process, consistent with historically weaker anchoring of inflation expectations.
  - As a result, supply shocks that generate persistent inflation (e.g., the energy price shocks unfolding in 2026) are expected to produce stronger and more durable second-round wage effects in CESEE than in AEs, where better-anchored expectations provide some insulation.
- Statistical tests:
  - Formal Wald tests do not point to systematic asymmetry across positive and negative realizations of unemployment gap, productivity growth, and past inflation.
  - A Chow test rejects equality of coefficients between AE and CESEE panels for the model as a whole and individually for past inflation and the unemployment gap.

### Negotiated nominal wage growth and the wage drift (selected AEs)
- In collective bargaining systems, aggregate nominal wage growth = negotiated wages + wage drift.
  - Negotiated wages: outcomes of collective bargaining (agreed base pay changes).
  - Wage drift: all wage components not covered by agreements (individual bonuses, overtime, promotion-related increments).
- Quarterly negotiated wage data collected for nine advanced European economies (Austria, Belgium, Finland, France, Germany, Italy, the Netherlands, Spain, Sweden).
- Wage drift definition: difference between growth in actual wages per employee and growth in negotiated wages.
- Recent dynamics:
  - The wage drift responded first to the 2022-23 inflation shock, with negotiated wages adjusting afterward.
  - In 2021–22, the wage drift contributed an average of 3 percentage points to annual nominal wage growth in AEs, well above the pre-pandemic average of around [text truncated in source at this point].

*Source: IMF Working Paper — chapter “1. Empirical Framework”*

### 0.1 percentage point (Figure 4). By 2023–24, as collective agreements were renewed and formal negotiations

### Wage Dynamics in Europe

### Asymmetric drivers of negotiated wages and wage drift
- Negotiated wages absorbed the inflation pass-through: inflation compensation during 2021–24 was progressively formalized through collective bargaining as contracts were renewed; the inflation pass-through is concentrated entirely on negotiated wages.
- The wage drift is driven by labor productivity growth and hours-per-employee growth, but not by past inflation in the same way as negotiated wages.
- Labor market slack operates through both channels but reaches statistical significance only in the negotiated wage equation:
  - A 1 percentage point rise in the unemployment gap is associated with a 0.2 percentage point decline in negotiated wage growth.
- Negotiated wages exhibit strict downward nominal rigidity over the 2006–2025 sample: negotiated wage growth is never negative.
- The wage drift fluctuates in both directions and provides the only margin of downward adjustment during adverse shocks; when productivity shocks are negative or stagnant, adjustment occurs through wage drift compression rather than negotiated wage cuts.

### Econometric framework and decomposition
- The paper re-estimates the benchmark specification by OLS on two auxiliary equations (equations (3) and (4)) with dependent variables:
  - Δw_i,t^neg: quarter-on-quarter annualized nominal negotiated wage growth.
  - Δw_i,t^drift: quarter-on-quarter annualized wage drift.
- The wage drift is computed as the difference between year-on-year growth in wage per employee and growth in negotiated wages.
- Seasonality: negotiated wages series are seasonally adjusted using the X-13 ARIMA procedure.
- Panel estimation results reported in Table A.II.3 (columns (2) and (3)); column (1) provides benchmark aggregate estimates for the nine-country AE sample.

### Role of collective bargaining coverage
- Interaction analysis between collective bargaining coverage and (i) the unemployment gap and (ii) lagged inflation shows a significant amplifying role of collective bargaining coverage:
  - For labor market slack:
    - At low coverage (25th percentile), the response of negotiated wages to the unemployment gap is small and statistically indifferent from zero.
    - At high coverage (75th percentile), the effect is statistically significant and reaches approximately −0.4.
  - For inflation pass-through:
    - Sensitivity of negotiated wages to past inflation is about 0.3 for low coverage versus 0.5 for high coverage.
- Implication: Countries with high collective bargaining coverage may see quicker and more lasting wage adjustments to shocks (example noted: the global energy supply shock unfolding in 2026).

### Dynamics and sequencing of adjustment (post-pandemic)
- Negotiated wages:
  - Past inflation accounts for the bulk of post-pandemic deviations from mean.
  - Residuals initially negative after 2020 (contract stickiness), turning positive from 2022 onward as unions bargained wage increases above model predictions to recover accumulated real wage losses.
- Wage drift:
  - Jumped above average immediately after the pandemic, driven by recovery in hours worked as job-retention schemes were unwound and discretionary pay rises ahead of formal bargaining.
  - From 2023 onward, the wage drift moderated even as negotiated wages remained elevated, indicating gradual reabsorption of inflation compensation into collective agreements.

### Out-of-sample projections and regional patterns
- Pre-pandemic parameters (estimated over 2006Q1–2019Q4) applied to post-2019 regressors produce widening gaps between actual and expected wage growth after 2020:
  - The gap averages 3.4 percentage points in AEs between 2022 and 2024.
  - The gap reaches 8.5 percentage points in CESEE over the same period.
- Disaggregation for AEs:
  - The aggregate underprediction in 2021–22 was driven primarily by wage drift.
  - From mid-2023 onward, persistent residuals reflected underprediction of negotiated wage growth as unions bargained more aggressively during contract renewals.
- For CESEE:
  - Large in-sample residuals are evident from 2017 onward; the post-pandemic divergence may reflect amplification of pre-existing misalignments rather than a pure pandemic-induced structural break.

### Tests for shifts in the wage Phillips curve and state-dependent behavior
- Rolling 16-quarter estimations and interaction tests (post-2020 dummy) indicate:
  - Inflation expectations played a stronger role earlier in the AE sample but became less important after around 2015.
  - Sensitivity of wage growth to past inflation increased over time in both AE and CESEE, particularly after 2021.
  - The slope of the wage Phillips curve appears to have flattened temporarily during the post-pandemic period but by 2025 reverted to its average value.
- Evidence points to regime-dependent behavior rather than a permanent structural break:
  - Threshold analysis conditioned on the inflation environment: slope with respect to the unemployment gap is statistically indistinguishable between high- and low-inflation regimes; only the intercept differs.
  - The wage drift inflation coefficient surged during 2022–2023 and returned to approximately zero by end-2024 as contracts were renewed and the inflation environment normalized.
  - Stability of negotiated wage parameters and absence of slope changes reinforce interpretation that post-2020 changes reflect state-dependent responses to an extreme inflation environment.

### Negotiated wages versus wage drift: stability and temporary shifts
- Negotiated wage coefficients for all drivers remained broadly stable before and after 2020:
  - The post-pandemic surge in negotiated wage growth is consistent with standard pass-through to an unusually large inflation shock under stable bargaining parameters.
- Wage drift experienced a structural break after 2020:
  - Became more sensitive to past inflation (shifted from almost zero to a distinctly positive coefficient with non-overlapping confidence intervals).
  - Became more sensitive to hours-per-employee growth, reflecting large COVID-related swings in hours worked.
  - By end-2024 the wage drift inflation coefficient reverted to zero, consistent with new collective bargaining contracts taking effect.

### Micro-level evidence: Spain (section introduction)
- Spain provides a comprehensive agreement-level dataset with near-universal bargaining coverage and detailed contract characteristics.
- The micro analysis links negotiated wage increases to inflation, labor market conditions, and agreement design to:
  - Address within-country heterogeneity in wage outcomes masked by aggregate data.
  - Capture institutional details of wage-setting not observable in macro datasets.
- Spain is treated as an illustrative case of a high-coverage, institutionally rich collective bargaining system to study mechanisms affecting the response of wages to inflation shocks.

*Source: IMF Working Paper excerpt — Wage Dynamics in Europe (selected sections).*

### 1. Data

### 1. Data

### Dataset and sample composition
- Comprehensive dataset from the Spanish Ministry of Labor covering all collective bargaining agreements registered in Spain between 2013Q1 and 2025Q2.
- Agreement-level information includes negotiated wage increases and a wide array of institutional features.
- Analysis focuses on characteristics of each agreement at the time it was signed, including:
  - presence of inflation indexation clauses;
  - duration of the agreement (annual versus multiannual);
  - level of bargaining (firm-level versus above firm-level).
- Local macroeconomic controls use regional (autonomous community) data from the National Statistics Institute (INE): lagged quarterly inflation (quarter-on-quarter, annualized) and the unemployment gap.
- Sample size: about 21,000 collective bargaining agreements signed between 2013Q1 and 2025Q2.
- Indexation prevalence:
  - Approximately 30 percent of agreements contain indexation clauses.
  - About half of indexation clauses—around 15 percent of all agreements—are linked to the CPI.
- Bargaining level and coverage:
  - Agreements concluded above the firm level account for about 20 percent of agreements but 90 percent of workers covered by collective bargaining agreements.
- Contract duration:
  - Nearly 14 percent of agreements are annual; the remainder are multi-year.

### Negotiated wage dynamics (agreement-level)
- Median nominal wage increases:
  - Remained around 1.5 percent annually between 2013 and 2019 (pre-pandemic).
  - Accelerated sharply beginning in 2022.
  - Reached approximately 3.5 percent (median) by 2023.
  - Moderated to around 3 percent by mid-2025.

### Institutional features and recent evolution
- Pre-2020: limited use of indexation clauses, especially CPI-based indexation (~15 percent of agreements and workers).
- 2021–2023 inflation surge triggered increased adoption of indexation mechanisms, peaking in 2023–2024.
- Aggregate shares (agreements basis):
  - Indexation rose from 27 percent in the pre-COVID period to 31–33 percent in 2023–2024.
  - CPI-based indexation increased from 15.6 percent to 21–22 percent.
- Coverage-weighted shares (workers covered):
  - General indexation rose from 22 percent pre-COVID to a peak of 41 percent in 2023.
  - CPI-based indexation rose from 15 percent to over 30 percent.
- Many indexation clauses are partial and include caps or thresholds; common structure: fixed annual increase plus conditional CPI revision activating when actual inflation exceeds the agreed increase (often non-retroactive).
- Firm-level agreements show greater diversity (regional CPI references, multi-year cumulative revisions, floor guarantees, salary-tiered differentiation).
- Non-CPI indexation forms include public sector budget linkage, floors linked to the minimum wage, fixed increases without revision, company performance conditionality, and reference to national bargaining guidelines (AENC).
- Above-firm-level agreements have consistently represented about 20 percent of agreements but 90 percent of workers.
- Annual agreements constitute a small, steady portion (~13.7 percent pre-COVID), but the share of workers covered by annual agreements rose sharply during 2020 (pandemic) and again in 2022 (inflation surge), indicating shifts in coverage composition under macro stress.

### Interpretation of institutional changes
- The resurgence of indexation is less than feared relative to the 1990s/2000s but marks a structural shift that could make transmission of future inflationary shocks quicker and more pronounced.
- Caps and thresholds in many clauses imply wage adjustments may only partially reflect inflation surprises, tempering overall impact.

---

### 2. Empirical framework

- Dependent variable: 푤̂푖푠푟푡 = nominal negotiated wage growth stipulated by agreement i, in sector s, region r, signed in quarter t.
- Baseline specification (equation (5)):
  - 푤̂푖푠푟푡 = 훼푖푠푟 + ∑(훽1,푙 휋푟,푡−푙)_{l=1..4} + ∑(훽2,푙 휋푟,푡−푙 × 퐗푖푠푟푡)_{l=1..4} + 훾 푢푟푡 + 훿1 퐗푖푠푟푡 + 훿2 퐙푖푠푟푡 + 휑푠푟 + 휀푖푠푟푡
- Key variables:
  - 휋푟,푡−푙: lagged regional inflation (quarter-on-quarter, annualized).
  - 푢푟푡: regional unemployment gap (region’s unemployment rate minus its historical average).
  - 퐗푖푠푟푡: agreement characteristics interacted with past inflation: annual agreement indicator, indexation clause dummy, sectoral-bargaining dummy (1 = sectoral, 0 = firm-level).
  - 퐙푖푠푟푡: other agreement characteristics (log number of workers, log number of firms covered).
  - 휑푠푟: sector-region fixed effects.
- Rationale: micro-level Phillips curve linking agreed wages to lagged inflation and unemployment at the local level, while conditioning on institutional features to test how collective bargaining features shape inflation pass-through to wages.
- Note: Inflation expectations are not explicitly controlled due to lack of regional measures; average impact captured by region fixed effects.

---

### 3. Results: Core determinants of the wage Phillips curve

- Labor market slack:
  - Regional unemployment gap coefficient ≈ −0.16 across specifications (highly significant).
  - Interpretation: a 1-percentage-point increase in unemployment relative to its historical average is associated with a 0.16-percentage-point decline in agreed wage growth.
  - Stability: estimate is stable across specifications and slightly smaller than the 0.2 cross-country macro estimate reported elsewhere in the study.
- Past inflation (sum of four quarterly lags):
  - In specification excluding interactions (column (1)), sum of coefficients on past inflation = 0.10 (statistically significant at the 1-percent level).
  - Magnitude: small and well below 1, indicating partial pass-through of past inflation to negotiated wage growth.
  - In specifications with interactions, the direct coefficient on past inflation varies as explanatory power is taken by interaction terms.

---

### 4. Results: Role of institutional features of collective bargaining

- General finding: interaction terms between lagged inflation and three agreement characteristics (CPI indexation, bargaining level, contract duration) are positive and statistically significant—these institutional features amplify pass-through of inflation into negotiated wages.

- CPI indexation clauses (column (2)):
  - Interaction between past inflation and CPI indexation = 0.08.
  - Interpretation: indexation approximately doubles total inflation pass-through from 0.08 to 0.16.
  - Direct effect of indexation (excluding interaction) = 0.14 in column (2), indicating indexed agreements deliver substantially higher wage growth even after controlling for inflation—consistent with indexation correlating with stronger worker bargaining power.

- Sector-level bargaining (column (3)):
  - Interaction between past inflation and sector-level agreements = 0.10 (positive and significant).
  - Direct effect of past inflation (without interaction) is not statistically distinguishable from zero in this specification.
  - Interpretation: sector-level bargaining significantly drives transmission of past inflation into wage outcomes; firm-level agreements show substantially lower inflation sensitivity.

- Contract duration (column (4)):
  - Interaction between past inflation and annual contract duration = 0.06.
  - Implied total impact of a 1 percent inflation shock under annual contracts = 0.06 + 0.09 = 0.15 percent.
  - Comparison: ~0.15 percent under annual contracts versus 0.09 percent under multi-year contracts (about two-thirds larger pass-through for annual contracts).
  - Interpretation: more frequent renegotiation allows wages to adjust more quickly to recent inflation developments; multi-year agreements smooth compensation over time.

- Additional agreement characteristics:
  - Agreement size (log number of workers) coefficient ≈ 0.11–0.12 (positive, highly significant).
    - Interpretation: larger agreements (covering more workers) are associated with higher negotiated wage growth.
  - Log number of firms covered coefficient ≈ −0.09 (negative, significant).
    - Interpretation: agreements covering more firms (holding workers constant) tend to negotiate lower wage increases—possibly due to heterogeneity in firm performance and bargaining capacity.

- Indexation as endogenous:
  - Indexation is plausibly endogenous to macroeconomic conditions and agreement features.
  - Table A.II.10 (referenced) shows higher past inflation materially increases the probability of CPI indexation (quantitative detail truncated in the source excerpt).

*Source: IMF staff calculations based on agreement-level collective bargaining microdata from the Spanish Ministry of Labor and regional data from the National Statistics Institute (INE).*

### 0.4 percentage points for each 1 percentage point increase in inflation), while a wider unemployment gap

### wpiea2026120-source-pdf - 0.4 percentage points for each 1 percentage point increase in inflation), while a wider unemployment gap

### CPI indexation and collective bargaining features
- CPI indexation increases the sensitivity of negotiated wages to past inflation (estimated effect: 0.4 percentage points for each 1 percentage point increase in inflation).
- A wider unemployment gap reduces negotiated wage growth (by about 1 percentage point for each one percentage point higher gap).
- CPI indexation is 5–7 percentage points less likely in sector-level agreements.
- CPI indexation is less prevalent in agreements covering more workers but more likely in agreements spanning more firms.
- Sector-level agreements are associated with higher negotiated wage growth and stronger inflation pass-through, suggesting indexation is an endogenous bargaining outcome that reinforces feedback between inflation and negotiated wage dynamics.

### Impact of labor market tightness on pass-through of past inflation to wages
- Analysis includes an interaction between the sum of past inflation and the unemployment gap; two samples are used:
  - Full sample: 2013–2025 (column 1).
  - Pre-COVID sample: 2013–2019 (column 2).
- Full sample findings:
  - Direct effects of past inflation and the unemployment gap align with prior results.
  - The interaction term between past inflation and the unemployment gap is material and statistically significant.
  - Interpretation: tight labor markets (low unemployment) strengthen workers’ bargaining power and amplify the pass-through of past inflation to wages; high inflation combined with low unemployment generates larger wage increases than either factor alone.
- Pre-COVID comparison:
  - In 2013–2019 the interaction term is essentially zero and statistically insignificant.
  - Suggests the amplified interaction is a recent phenomenon linked to the renewed centrality of inflation in wage negotiations post-2020.

### Robustness checks
- Alternative fixed effects:
  - Across specifications, the unemployment gap coefficient remains negative, highly significant, and close to the baseline estimate of around −0.16.
  - Interaction terms between past inflation and CPI indexation, sector-level bargaining, and annual contract duration remain positive, statistically significant, and similar in magnitude to the baseline.
- Alternative measures of labor market slack:
  - Replacing the unemployment gap with a vacancy-to-unemployment ratio at the autonomous community level yields a positive and statistically significant coefficient on tightness.
  - Coefficients on past inflation and its interactions (CPI indexation, bargaining level, contract duration) remain stable and statistically significant.
- Geographic aggregation:
  - Redefining inflation and labor market slack at the provincial level (linked via the Ministry of Labor branch province where agreements are registered) preserves main results despite measurement noise.
  - The unemployment gap remains strongly negative and significant.
  - Interaction terms between past inflation and CPI indexation, and sector-level bargaining remain positive and significant with similar magnitudes.
  - Interaction between past inflation and annual contract duration becomes statistically insignificant at the province level; direct effect of agreement duration is also statistically insignificant.

### Discussion and policy implications
- Institutional features of wage-setting significantly shape wage dynamics:
  - Indexation clauses, above-firm-level bargaining, and frequent contract renewals strengthen the link between past inflation and wage growth, increasing persistence of wage-price dynamics.
  - Indexation clauses can endogenously emerge when inflation is high.
- Policy relevance:
  - In economies with widespread collective bargaining and sector-level agreements, resurgence of indexation clauses could accelerate and amplify inflation pass-through to wages, sustaining inflationary momentum.
  - In CESEE, where collective bargaining coverage is low and bargaining is mostly at the firm level, such mechanisms have been less prevalent, leading to more flexible wages and less formal indexation—though this could change.
  - It will be important to monitor initiatives (e.g., Directive (EU) 2022/2041 on adequate minimum wages) to ensure they do not unintentionally foster institutional features (such as formal indexation clauses) that strengthen price-wage loops and increase inflation persistence.

### Spillovers from minimum and public wage policies — overview
- Two policy instruments analyzed: statutory minimum wages and public sector wages.
- Stylized recent developments:
  - Minimum wages have risen markedly in real terms and relative to the median wage in some cases.
  - Public wages saw sharp real declines after the inflation shock (mostly in AEs), followed by catch-up increases mostly in CESEE.
- Literature context:
  - U.S. evidence finds modest spillovers; Kaitz ratio historically around 0.35 in the U.S. limits upward spillovers.
  - European evidence shows stronger spillovers where the Kaitz ratio is closer to the median (examples: France >0.55, Portugal >0.60).
  - Public sector wage shocks have positive but heterogeneous spillovers to private wages.

### Common empirical framework for spillover analysis
- Method: local projections (Jordà, 2005) tracing cumulative change in real wages from period t−1 to t+ h as function of real wage shock.
- Variables are written in real terms to net out common inflation responses.
- Baseline specification (notation preserved from source):
  - ln y_{i,t+h} − ln y_{i,t−1} = β_h Δln(stock_{i,t}) + Σ_{k=1}^L θ_{h,k} ugap_{i,t−k} + Σ_{k=1}^L φ_{h,k} Δln lp_{i,t−k} + ω_{h,k} X_{i,t} + Σ_{k=1}^L ρ_{h,k} Δln(stock_{i,t−k}) + Σ_{k=1}^L σ_{h,k} Δln y_{i,t−k} + α_i + γ_{t+h} + ε_{i,t}
- Endogeneity mitigation:
  - Real terms specification, lag structures, country and time fixed effects; no instrumentation due to lack of a clear instrument.
- Group-specific impulse responses:
  - Add β_{h,g}(Δln(stock_{i,t}) × 1_{i∈g}) and compute IRF(h,g) = β_h + β_{h,g} for groups AE and CESEE (CESEE Euro Area members classified as CESEE).
- Standard errors clustered by country; confidence intervals use t-statistics due to small number of clusters.

### Empirical setup summary (as presented)
- Minimum Wages:
  - Outcome variable: Real compensation per worker (CPI-deflated), ln rcomp_{i,t} = ln(ncomp_{i,t}) − ln(CPI_{i,t}).
  - Shock variable: Real statutory minimum wage per month, ln rminwage_{i,t} = ln(minwage_{lc,i,t}) − ln(CPI_{i,t}).
  - Sample: 22 European countries with statutory minimum wages; 2001H2–2024H2; semesterly.
  - Common controls: Lagged unemployment gap, union density, collective bargaining coverage, country effects, time effects.
  - Additional controls: Labor productivity per worker.
  - Lags of dependent variables: Lags up to 6 semesters.
  - Horizon: 3 years (6 semesters).
- Public Sector Wages:
  - Outcome variable: Real private sector wages per hour, ln rprv_wageh_{i,t} = ln(prv_wageh_{i,t}) − ln(CPI_{i,t}).
  - Shock variable: Real public sector wages per hour, ln rpub_wageh_{i,t} = ln(pub_wageh_{i,t}) − ln(CPI_{i,t}).
  - Sample: 27 countries; 2004Q2–2024Q3; quarterly.
  - Common controls: Lagged unemployment gap, union density, collective bargaining coverage, country effects, time effects.
  - Additional controls: Labor productivity per hours, public sector employment share, public sector vacancy rate.
  - Lags of dependent variables: 4 quarters.
  - Horizon: 3 years (12 quarters).
- Sources for data: Eurostat; OECD; Haver Analytics; IMF staff calculations.
- Note: Public sector wages per hour computed from public administration, education, and health (NACE Rev.2); private sector wages are the mean for remaining sectors.

*Italic: Source — IMF Working Paper content provided in the supplied PDF excerpt.*

### 2. Minimum Wages

### 2. Minimum Wages

### Overview
- Statutory minimum wages have risen markedly across Europe in recent years, with minimum-to-median wage ratios converging notably in CESEE toward AE levels.
- The analysis allows pass-through to differ across two sub-periods — 1999H1–2014H2 and 2015H1–2024H2 — motivated by convergence around 2015 and prior IMF estimates for a comparable pre-2015 sample (IMF, 2016).
- Tests examine heterogeneity via interactions with the bite of the minimum wage (Kaitz index), collective bargaining coverage, and union density.

### Full-sample findings: modest average pass-through with AE/CESEE heterogeneity
- For the full sample, estimated pass-through of minimum wage shocks to average real compensation is modest and short-lived:
  - Impact statistically significant for only up to one year (two semesters).
  - Peak elasticity reaches approximately 0.15.
  - Beyond one year the response is not statistically distinguishable from zero.
- Heterogeneity by group:
  - AEs: stronger and more persistent impact; elasticity rises over time and reaches approximately 0.25 by the end of year three.
  - CESEE: initial response slightly smaller, peaking at around 0.15 in the first semester, then declining and losing statistical significance at longer horizons.

### Time-period decomposition: pre-2015 vs post-2014
- Pre-2015 (1999H1–2014H2):
  - Estimated elasticities limited, peaking at approximately 0.11 and concentrated in the first six months.
  - AEs: larger and more persistent response, peaking at around 0.25 after three years.
  - CESEE: considerably smaller elasticities — peaking at approximately 0.1 in the first semester and quickly losing statistical significance.
  - Consistent with prior work (IMF, 2016), which estimated an impact of around 0.1 for a comparable sample.
- Post-2014 (2015H1–2024H2):
  - Estimated elasticities notably higher with statistically significant pass-through across all horizons for the full sample:
    - Peak impact of approximately 0.28 at five semesters for the full sample.
  - Strengthening concentrated in CESEE:
    - Peak elasticity rises to approximately 0.38 after eighteen months and is statistically significant and persistent across horizons.
  - AEs: elasticity shows no statistically significant change across the two sub-periods; the post-2014 interaction is statistically insignificant across all horizons.
  - Total post-2014 pass-through remains positive and statistically significant at short horizons; confidence bands widen substantially beyond the second semester.
  - The CESEE strengthening coincides with convergence of minimum-to-median wage ratios toward AE levels.

### Contribution to recent real wage growth (based on model starting 2015H1)
- Real minimum wage shocks since 2022H1 have contributed cumulatively by 2024H2:
  - AE: approximately 0.9 percentage point to real wage growth (accounting for 53 percent of real cumulative wage growth).
  - CESEE: approximately 1.1 percentage points (accounting for 13 percent of cumulative real wage growth).

### Exploring the sources of the CESEE shift
- The analysis tests candidate explanations for the strengthened CESEE pass-through since 2015 but finds no statistically significant support for common channels:
  - Minimum wage bite (Kaitz index) interactions tested:
    - (i) 1-year lagged minimum-to-median wage ratio;
    - (ii) pre-2015 average (2005–2013) as baseline;
    - (iii) change in the ratio between the 2020–2024 and 2005–2008 averages.
    - None of these interactions yields statistically significant coefficients.
  - Labor market institutions:
    - Interactions with union density and bargaining coverage show no statistically significant evidence of association with higher pass-through.
- Conclusion: the strengthening in CESEE reflects a structural shift whose origins are difficult to pin down using aggregate cross-country data; standard explanatory channels (relative bite, union density, collective bargaining coverage) are not found to significantly correlate with the shift.

### Key implications and takeaways
- Minimum wage increases generated temporary and limited boosts to average wages in the full sample, but effects are stronger and more persistent in AEs historically and have become stronger in CESEE since 2015.
- The marked CESEE strengthening since 2015 is not explained by tested measures of minimum wage bite or by union-related metrics at the aggregate level, pointing to channels that aggregate data are less able to identify.
- Policy-relevant numeric findings to preserve:
  - Peak elasticities and horizons: approximately 0.15 (full sample peak), approximately 0.25 (AEs by end of year three), approximately 0.11 (pre-2015 full sample peak), approximately 0.28 (post-2014 full sample peak at five semesters), approximately 0.38 (post-2014 CESEE peak after eighteen months).
  - Cumulative contributions since 2022H1 to 2024H2: 0.9 percentage point (AE; 53 percent of real cumulative wage growth) and 1.1 percentage points (CESEE; 13 percent of cumulative real wage growth).
- Interpretation for policymakers:
  - Discretionary increases in minimum wages can produce meaningful near-term effects on average wages, especially where the pass-through has strengthened (CESEE post-2015).
  - Because the strengthening in CESEE is not readily explained by commonly measured structural variables, careful country-level analysis is warranted when designing minimum wage policy.
  - Any new discretionary minimum wage increases would constitute a fresh impulse to wage growth, and interaction with other wage-setting mechanisms could amplify second-round effects on inflation.

*IMF Working Paper — 2. Minimum Wages*

### Annex I. Additional Figures

### Annex I. Additional Figures

### Real Wage Gaps
- Figure A.I.1. Real Wage Gaps in AE and CESEE
  - Figure A.I.1 (a): Advanced Economies
  - Figure A.I.1 (b): CESEE
  - Sources: Eurostat, Haver Analytics, and authors’ calculations.

### Shifts in the Wage Phillips Curve — Advanced Economies (AE)
- Figure A.I.2. Shifts in the Wage Phillips Curve in AE
  - Figure A.I.2 (a). Rolling regressions for AE
  - Figure A.I.2 (b). Structural break for AE
  - Data and estimation notes:
    - Unbalanced panel data for 15 AE (excl. CESEE).
    - The model is estimated on a rolling window (16 quarters) over the 2006Q1-2024Q4 period.
    - Upper panel: shaded areas represent 90 percent confidence intervals.
  - Sources: IMF staff estimates.

### Shifts in the Wage Phillips Curve — CESEE
- Figure A.I.3. Shifts in the Wage Phillips Curve in CESEE
  - Figure A.I.3 (a). Rolling regressions for CESEE
  - Figure A.I.3 (b). Structural break for CESEE
  - Data and estimation notes:
    - Unbalanced panel data for 15 AE (excl. CESEE) and 11 CESEE countries.
    - The model is estimated on a rolling window (16 quarters) over the 2006Q1-2024Q4 period.
    - Shaded areas represent 90 percent confidence intervals.
  - Sources: IMF staff estimates.

### Negotiated Wages — Indices and Dynamics
- Figure A.I.4. Comparison of Indices on Negotiated Wages (Percent, year-on-year)
  - Sources: National sources; Haver Analytics; and IMF staff estimates.
  - Note: the blue line shows the weighted average growth (using GDP-PPP weights) in negotiated wages for nine 9 EU countries.
- Figure A.I.5. Shifts in the Wage Phillips Curve for Negotiated Wages
  - Figure A.I.5 (a). Rolling regressions for Negotiated Wages
  - Figure A.I.5 (b). Structural break for Negotiated Wages
  - Estimation note:
    - The model is estimated on a rolling window (16 quarters) over the 2006Q1-2024Q4 period.
    - Upper panel: shaded areas represent 90 percent confidence intervals.
  - Sources: IMF staff estimates.

### Wage Drift — Dynamics and Structural Shifts
- Figure A.I.6. Shifts in the Wage Phillips Curve for the Wage Drift
  - Figure A.I.6 (a). Rolling regressions for the Wage Drift
  - Figure A.I.6 (b). Structural break for the Wage Drift
  - Estimation note:
    - The model is estimated on a rolling window (16 quarters) over the 2006Q1-2024Q4 period.
    - Upper panel: shaded areas represent 90 percent confidence intervals.
  - Sources: IMF staff estimates.

### Collective Bargaining Coverage Effects on Negotiated Wages
- Figure A.I.7. Effects of Collective Bargaining Coverage on Negotiated Wages
  - Figure A.I.7 (a). Effect of a 1 Percentage Point Increase in Unemployment Gap on Negotiated Wages
  - Figure A.I.7 (b). Effect of a 1 Percentage Point Increase in Annual Inflation on Negotiated Wages
  - Estimation and interpretation notes:
    - Low = 25th percentile; High = 75th percentile.
    - 90 percent confidence interval.

### Slope of the Wage Phillips Curve in High and Low Inflation Environments
- Figure A.I.8. The Slope of the Wage Phillips in High and Low Inflation Environment (x-axis: percentage points; y-axis: percent)
  - Figure A.I.8 (a). Binscatter Plots for Negotiated Wages
    - Binscatter equations shown in the figure:
      - y = - 0.21x + 1.90
      - y = - 0.19x + 2.86
    - Plot axes labels (as in figure):
      - x-axis: Unemployment Gap
      - y-axis: Negotiaed Wages (q/q annualized)
  - Figure A.I.8 (b). Binscatter Plots for Wage Drift
    - Binscatter equations shown in the figure:
      - y = - 0.11x + 0.22
      - y = - 0.31x + 0.27
    - Plot axes labels (as in figure):
      - x-axis: Unemployment Gap
      - y-axis: Wage Drift (percent, q/q annualized)
  - Estimation note:
    - Binscatter plots with 50 bins, controlling for country fixed effects, inflation expectations, labor productivity, wage catch up and hours per employee growth.
  - Sources: National sources; Haver Analytics; and IMF staff estimates.

### Minimum Wage Impacts and Interactions
- Figure A.I.9. Impulse Response for 1 Percent Increase in Real Statutory Minimum Wages
  - (Figure presented as impulse response; source details below.)
- Figure A.I.10. Minimum Wage Interactions with Median Wage Relative Bite (Cumulative LP response; t-based 95% confidence intervals)
  - Sources: OECD; Eurostat; Haver Analytics, author calculations
  - Note: Clockwise from top left each chart shows interaction of median wage with:
    - i) lagged minimum-to-median ratio;
    - ii) the change in the average Kaitz index between 2015-24 and 2005-2013;
    - iii) a dummy that takes the value of 1 if the shock is greater than 1 standard deviation from mean minimum wage growth times the lagged Kaitz index;
    - iv) a dummy that takes values 1 if the Kaitz index is higher than the sample median.

### Minimum Wage Interactions with Labor Market Institutions
- Figure A.I.11. Minimum Wage Interactions with Labor Market Institutions (Cumulative LP response; t-based 95% confidence intervals)
  - Sources: OECD/AIAS ICTWSS; Eurostat; Haver Analytics; IMF staff calculations.
  - Note: Left panel shows interaction with collective bargaining coverage; right panel with union density ratio. Neither interaction is statistically significant.

### Public Sector Wage Interactions and Public Sector Share
- Figure A.I.12. Public Sector Wage Interactions with Public Sector Share of Employment (Cumulative LP response; t-based 95% confidence intervals)
  - Sources: OECD/AIAS ICTWSS; Eurostat; Haver Analytics; IMF staff calculations.
  - Note:
    - Left panel shows the coefficient of the interaction between the 1-quarter lagged share of the public sector in total employment by number of workers and the contemporaneous change in real public sector wages.
    - Right panel shows the difference between the unconditional passthrough (i.e. the coefficient on the contemporaneous change in real public sector wages) of AEs minus that of CESEE.

### Public Wage Shock Interaction with Union Density
- Figure A.I.13. Interaction of Public Wage Shock with Union Density Ratio (Cumulative LP response; t-based 90% confidence intervals)

*Source: Annex I. Additional Figures, IMF WORKING PAPERS — Wage Dynamics in Europe; INTERNATIONAL MONETARY FUND.*

### Annex II. Additional Tables

### Annex II. Additional Tables

### Benchmark Wage Phillips Curve Estimations (AE and CESEE)
- Sample and estimation:
  - Unbalanced panel for 15 AE (excl. CESEE) and 11 CESEE countries; model estimated over the 2006Q1-2024Q4 period. Standard errors corrected for heteroscedasticity and autocorrelations. Country fixed effects included.
  - Observations: 1,952 (All), 1,140 (AE), 812 (CESEE). Number of countries: 26 (All), 15 (AE), 11 (CESEE). R-squared: 0.243 (All), 0.284 (AE), 0.304 (CESEE).
- Key coefficient estimates (Dependent variable: Wage growth, quarter-on-quarter annualized):
  - Lagged inflation (Sum of coefficients): 0.309** (All; (0.120)), 0.256** (AE; (0.0918)), 0.406* (CESEE; (0.182)).
  - Inflation expectations: 1.358 (All; (0.918)), 1.998** (AE; (0.879)), 0.801 (CESEE; (1.347)).
  - Wage catch up: -0.246*** (All; (0.078)), -0.152** (AE; (0.065)), -0.272** (CESEE; (0.094)).
  - Unemployment gap: -1.156*** (All; (0.372)), -0.298** (AE; (0.104)), -1.666*** (CESEE; (0.522)).
  - Labor productivity growth: 0.495*** (All; (0.164)), 0.213* (AE; (0.116)), 0.766*** (CESEE; (0.210)).
  - Hours per employee growth: -0.028 (All; (0.086)), 0.125 (AE; (0.091)), -0.192* (CESEE; (0.099)).

### Negotiated Wages: Data Sources and Benchmark with Wage Drift
- Data sources for negotiated wages:
  - Country-level series and earliest data availability (examples):
    - Austria: Statistics Austria — Index of agreed minimum wages/Negotiated standard wage rate index — Since 1986.
    - Belgium: Federal Public Service Employment, Labour and Social Dialogue — Indice des salaires conventionnels — Since 1959.
    - Finland: Statistics Finland — Index negotiated wages and salaries — Since 2005.
    - France: Banque de France — Negotiated wages — Since 2006.
    - Germany: Destatis — Indices of agreed earnings — Since 1995.
    - Italy: Istat — Wages according to collective bargaining agreements — Since 2005.
    - Netherlands: Statistics Netherlands — Negotiated wages — Since 1990.
    - Spain: Ministry of Labor and Social Economy, Haver Analytics — Collective bargaining agreed wages — Since 1995.
    - Sweden: Swedish National Mediation Office — Negotiated wages — Since 1992.
- Benchmark with negotiated wages and wage drift (country sample: Austria, Belgium, Finland, France, Germany, Italy, Netherlands, Spain, Sweden; period 2006Q1-2024Q4):
  - Observations: 683. Number of countries: 9.
  - R-squared across specifications: 0.622 (Wage per employee), 0.296 (Negotiated wages), 0.607 (Wage drift).
  - Lagged inflation (Sum of coefficients): 0.368*** (Wage per employee; 0.0996), 0.363*** (Negotiated wages; 0.106), 0.005 (Wage drift; 0.0952).
  - Inflation expectations: 0.466 (Wage per employee; (0.262)), 0.690 (Negotiated wages; (0.373)), -0.224 (Wage drift; (0.427)).
  - Wage catch up: -0.157* (Wage per employee; (0.082)), -0.017 (Negotiated wages; (0.036)), -0.141 (Wage drift; (0.094)).
  - Unemployment gap: -0.482* (Wage per employee; (0.254)), -0.223*** (Negotiated wages; (0.038)), -0.259 (Wage drift; (0.271)).
  - Labor productivity growth: 0.311*** (Wage per employee; (0.052)), -0.005 (Negotiated wages; (0.019)), 0.316*** (Wage drift; (0.068)).
  - Hours per employee growth: 0.236** (Wage per employee; (0.076)), 0.012 (Negotiated wages; (0.012)), 0.224** (Wage drift; (0.080)).

### Negotiated Wages and Collective Bargaining Coverage
- Sample as above (9 countries, 2006Q1-2024Q4); Observations: 683; R-squared up to 0.353.
- Selected estimates (Dependent variable: Negotiated Wage growth, quarter-on-quarter annualized):
  - Lagged inflation (Sum of coefficients): 0.363*** (spec 1; 0.106), 0.361** (spec 2; 0.108), 0.358*** (spec 3; 0.104), -0.657** (spec 4; 0.382).
  - Unemployment gap: -0.223*** (spec 1; (0.038)), -0.208*** (spec 2; (0.049)), 1.879** (spec 3; (0.618)), -0.166** (spec 4; (0.053)).
  - Inflation expectations: 0.690 (spec 1; (0.373)), 0.659 (spec 2; (0.365)), 0.690* (spec 3; (0.338)), 0.738* (spec 4; (0.363)).
  - Collective bargaining coverage (Cov. Bargaining): -2.408 (spec 2; (3.238)), -2.642 (spec 3; (3.051)), -7.509** (spec 4; (2.889)).
  - Interaction terms:
    - Cov. Bargaining × Unemployment gap: -2.356*** ((0.695)) included in spec 4.
    - Cov. Bargaining × Lagged inflation: 1.174** ((0.382)) included in spec 4.

### Micro-Level Phillips Curve: Baseline and Robustness Results (Collective Bargaining Agreements)
- Dependent variable: Wage growth agreed in collective bargaining. Sample sizes typically around 9,399 observations (baseline), with sector and region fixed effects in many specifications.
- Baseline key estimates (Table A.II.6):
  - Sum of Past Inflation: 0.10*** (spec 1; (0.01)), 0.08*** (spec 2; (0.01)), 0.00 (spec 3; (0.03)), 0.09*** (spec 4; (0.01)).
  - Unemployment Gap: -0.16*** across specs (e.g., -0.16*** (0.00)).
  - CPI Indexation: 0.35*** (spec 1; (0.04)), 0.14*** (spec 2; (0.04)), 0.35*** (spec 3; (0.04)), 0.36*** (spec 4; (0.04)).
  - Sector-Level indicator: 0.27* (spec 1; (0.14)), 0.26* (spec 2; (0.14)), 0.10 (spec 3; (0.14)), 0.27* (spec 4; (0.14)).
  - Ln(Affected Workers): 0.11*** (all specs; (0.02)).
  - Ln(Affected Firms): -0.09*** (all specs; (0.03)).
  - R-squared: 0.27. Observations: 9,399.
- Interplay of past inflation and unemployment gap (Table A.II.7):
  - Full sample (spec 1): Sum of Past Inflation 0.079*** ((0.01)); Unemployment Gap -0.15*** ((0.00)); Sum of Past Inflation × Unemployment Gap -0.006*** ((0.00)). R-squared: 0.27; Obs: 9,399.
  - Pre-COVID (spec 2): Sum of Past Inflation 0.078***; Unemployment Gap -0.12***; Sum of Past Inflation × Unemployment Gap -0.001 (not significant). R-squared: 0.34; Obs: 5,783.
- Fixed effects and alternative slack measures:
  - Results robust across different combinations of sector, region, and region-sector fixed effects (Tables A.II.8 and A.II.9). R-squared values range from 0.27 to 0.47 depending on specification and sample.
  - Alternative slack measure (Labor Market Tightness V/U) (Tables A.II.11 and A.II.12): Labor Market Tightness coefficient 3.81*** (Table A.II.11; (0.11)) and 3.72***/3.71*** in alternative FE setups (Table A.II.12; (0.11)). Sum of Past Inflation continues to show positive and often significant coefficients (e.g., 0.09*** in spec 1 of Table A.II.11).
- Province-level macro variables robustness (Tables A.II.13 and A.II.14):
  - Sum of Past Inflation significant (e.g., 0.11*** in spec 1 of Table A.II.13; (0.01)).
  - Unemployment Gap remains negative and significant (-0.15*** across province-level specs).
  - Ln(Affected Workers) and Ln(Affected Firms) remain significant with coefficients 0.15*** and -0.12*** respectively in province-level baseline (Table A.II.13).

### Determinants of CPI Indexation in Collective Bargaining Agreements
- Dependent variable: Indexation to CPI Dummy (Table A.II.10):
  - Sum of Past Inflation: 0.004** (spec 1; (0.00)), 0.006*** (specs 2 and 3; (0.00)).
  - Unemployment Gap: -0.01*** across specs (e.g., (0.00)).
  - Sector-Level: -0.05** (spec 1; (0.02)), -0.07** (specs 2 and 3; (0.03)).
  - ln(Workers): -0.01*** (spec 1; (0.00)); -0.01** (specs 2 and 3; (0.00)).
  - ln(Firms): 0.02*** across specs (e.g., (0.00)).
  - R-squared: 0.12 (spec 1), 0.23 (specs 2 and 3). Observations: 10,274 (spec 1), 10,194 (specs 2 and 3).

### Minimum Wage and Public Sector Wage Local Projections (Spillovers)
- Minimum wage local projections: Pre- and post-2015 (Table A.II.17; Dependent variable: Average Wages)
  - Advanced Economies (AE): Coefficients for Dln Min Wage (pre-2015) at horizons h = 0..6: 0.106** (h=0; (0.046)), 0.198** (h=1; (0.076)), 0.142* (h=2; (0.080)), 0.175* (h=3; (0.090)), 0.236** (h=4; (0.109)), 0.225** (h=5; (0.095)), 0.231** (h=6; (0.100)). Dln Min Wage (post-2015): 0.106** (h=0; (0.040)), 0.161** (h=1; (0.060)), 0.095 (h=2; (0.064)), 0.145 (h=3; (0.091)), 0.142 (h=4; (0.096)), 0.269** (h=5; (0.117)), 0.286* (h=6; (0.161)).
  - CESEE: Dln Min Wage (pre-2015) and (post-2015) coefficients at horizons h = 0..6 show generally positive and often larger post-2015 effects (e.g., h=0: 0.057** pre-2015 (0.024) vs. 0.145*** post-2015 (0.031); h=1: 0.097** pre-2015 (0.039) vs. 0.245*** post-2015 (0.028)). Ugap (L1) coefficients near -0.003 to -0.006; Labor Prod. (L1) positive and occasionally significant (e.g., 0.087* at h=0 (0.047)).
  - Notes: Coefficients from local projections (Jorda 2005). Standard errors clustered at the country level.
- Public sector wage spillovers to average hourly private sector wages (Table A.II.18)
  - Dependent variable: Average Hourly Private Sector Wages. Public Wage Spillover Controls (L1). Coefficients reported for horizons h = 0..12.
  - Dln Pub Wage (AE) coefficients (h=0..12): 0.451*** (h=0; (0.084)), 0.474*** (h=1; (0.115)), 0.497*** (h=2; (0.141)), 0.477*** (h=3; (0.165)), 0.487*** (h=4; (0.161)), 0.418*** (h=5; (0.149)), 0.446*** (h=6; (0.134)), 0.454*** (h=7; (0.153)), 0.290** (h=8; (0.132)), 0.314** (h=9; (0.130)), 0.374** (h=10; (0.135)), 0.375*** (h=11; (0.134)), 0.353** (h=12; (0.144)).
  - Dln Pub Wage (CESEE) coefficients (h=0..12): 0.212*** (h=0; (0.063)), 0.268*** (h=1; (0.068)), 0.278*** (h=2; (0.066)), 0.271*** (h=3; (0.075)), 0.249*** (h=4; (0.076)), 0.273*** (h=5; (0.070)), 0.272*** (h=6; (0.062)), 0.297*** (h=7; (0.057)), 0.280*** (h=8; (0.054)), 0.338*** (h=9; (0.064)), 0.308*** (h=10; (0.056)), 0.317*** (h=11; (0.058)), 0.277*** (h=12; (0.076)).
  - Controls: Ugap coefficients reported near 0.001–0.003 (not consistently significant); Labor Prod. coefficients negative and sometimes significant (e.g., -0.134*** at h=0; (0.042)).
  - Notes: Coefficients from local projections (Jorda 2005). Standard errors clustered at the country level.

### Country Samples for Analyses
- List of countries in sample (Table A.II.5):
  - Advanced Economies: Austria, Belgium, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Netherlands, Norway, Portugal, Spain, Sweden, United Kingdom.
  - CESEE: Bulgaria, Croatia, Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Romania, Slovak Republic, Slovenia.
- Minimum wage analysis sample (Table A.II.15):
  - Advanced Economies: Belgium, France, Germany, Greece, Ireland, Luxembourg, Malta, Netherlands, Portugal, Spain, United Kingdom.
  - CESEE: Bulgaria, Croatia, Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Romania, Slovak Republic, Slovenia.
- Public sector wage analysis sample (Table A.II.16) includes a broader set of Advanced Economies and CESEE countries (lists as provided in the table).

*Wage Dynamics in Europe: Drivers, Institutional Amplifiers, and Policy Spillovers — Working Paper No. WP/2026/120 — Annex II. Additional Tables*

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_Source: https://www.imf.org/-/media/files/publications/wp/2026/english/wpiea2026120-source-pdf.pdf_