The Wage-Price Spiral: Industrial Country Evidence and Implications

IMF Working Papers, August 1, 2003

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The Wage-Price Spiral: Industrial Country Evidence and Implications

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Bibliographic details

• Authors: Magda E. Kandil
• Published: August 1, 2003
• Series: IMF Working Papers
• DOI: https://doi.org/10.5089/9781451858013.001

Summary

• Using quarterly time-series data for a sample of twelve industrial countries, the paper investigates the dynamics of nominal wage and price adjustments in the face of aggregate demand shocks.
• The evidence illustrates patterns of the wage-price spiral and accompanying fluctuations.
• During economic expansions, the overlap of nominal adjustments in labor and product markets:
  • prolongs output expansion, and
  • maintains or increases the standard of living.
• Structural and institutional settings appear to have moderated the severity of the effects of contractionary demand shocks on:
  • real output growth, and
  • the standard of living in the variety of countries under investigation.

Key Findings and Evidence

• Analysis based on quarterly time-series data for a sample of twelve industrial countries.
• Identified patterns of the wage-price spiral associated with aggregate demand shocks.
• Asymmetric responses across countries linked to structural and institutional differences.
• During expansions, synchronized nominal adjustments in labor and product markets extend output growth and support standards of living.
• During contractionary demand shocks, country-specific structural and institutional factors mitigated adverse effects on real output growth and standards of living.

Themes and Keywords

• Subject: Commodity markets, Financial markets, Labor, Labor markets, Real wages, Wage adjustments, Wages
• Keywords: Asymmetric Fluctuations, Commodity markets, contractionary demand shocks, Labor markets, nominal wage, Output Effect, price inflation, real wage adjustment, real wage growth, Real wages, Standard of Living, Wage adjustments, Wage-Price Spiral, Wages, WP

Data, Methodology, and Scope

• Data frequency: quarterly time-series.
• Sample: twelve industrial countries.
• Focus: dynamics of nominal wage and price adjustments; responses to aggregate demand shocks; implications for output and standard of living.

Policy Implications and Interpretations

• Overlap/timing of nominal adjustments in labor and product markets matters for the duration of expansions and maintenance of living standards.
• Structural and institutional settings can moderate the impact of contractionary demand shocks on real output growth and standards of living, implying policy and institutional design influence macroeconomic resilience.

Content in this bundle

• The Wage-Price Spiral: Industrial Country Evidence and Implications - WP/03/164
  • The Wage-Price Spiral: Industrial Country Evidence and Implications - WP/03/164 (Markdown version)
  • The Wage-Price Spiral: Industrial Country Evidence and Implications - WP/03/164 (PDF)