Wage Growth and Inflation in Europe: A Puzzle?

Author/Editor:

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

Publication Date:

December 20, 2019

Electronic Access:

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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.

Series:

Working Paper No. 19/280

Subject:

English

Publication Date:

December 20, 2019

ISBN/ISSN:

9781513521275/1018-5941

Stock No:

WPIEA2019280

Price:

$18.00 (Academic Rate:$18.00)

Format:

Paper

Pages:

40

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