Wage-Price Spirals: What is the Historical Evidence?
IMF Working Papers, November 11, 2022
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Bibliographic details
- Authors: Jorge A Alvarez, John C Bluedorn, Niels-Jakob H Hansen, Youyou Huang, Evgenia Pugacheva, Alexandre Sollaci
- Published: November 11, 2022
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9798400224294.001
Summary findings
- Definition used: a wage-price spiral is an episode where at least three out of four consecutive quarters saw accelerating consumer prices and rising nominal wages.
- Main empirical finding: only a small minority of such episodes were followed by sustained acceleration in wages and prices.
- Typical outcome: inflation and nominal wage growth tended to stabilize, leaving real wage growth broadly unchanged.
- Specific pattern examined: in episodes that mimic the recent pattern of falling real wages and tightening labor markets, declining inflation and nominal wage growth increases tended to follow, allowing real wages to catch up.
- Policy-relevant conclusion: an acceleration of nominal wages should not necessarily be seen as a sign that a wage-price spiral is taking hold.
Data and scope
- Coverage: past wage-price spirals among a wide set of advanced economies going back to the 1960s.
- Publication date: November 11, 2022.
- Pages: 29.
- Series: Working Paper No. 2022/221.
- Issue: 221.
- Volume: 2022.
Methodology and analysis
- Episode identification rule: at least three out of four consecutive quarters with accelerating consumer prices and rising nominal wages.
- Analytical approach: creation of a database of past wage-price spiral episodes across advanced economies.
- Decomposition technique: wage dynamics decomposed using a wage Phillips curve to assess forces behind nominal wage stabilization.
Empirical results and interpretation
- Frequency: wage-price spiral episodes as defined were relatively rare in leading to sustained wage and price acceleration.
- Dynamics: nominal wage growth normally stabilizes at levels consistent with observed inflation and labor market tightness, according to wage Phillips curve decomposition.
- Recent-pattern episodes: when episodes featured falling real wages combined with tightening labor markets, subsequent declines in inflation and in the increases of nominal wage growth were observed, which permitted real wages to recover.
Keywords and subjects
- Subjects: Inflation, Labor, Labor markets, Prices, Real wages, Wage adjustments, Wages.
- Keywords: Inflation, Labor markets, Labor markets., nominal wage growth, Phillips curve, Phillips Curve estimation, Real wages, Wage adjustments, wage-price spiral, Wage-Price spiral, Wage-price spirals, Wages.
IMF Working Papers — Jorge A Alvarez, John C Bluedorn, Niels-Jakob H Hansen, Youyou Huang, Evgenia Pugacheva, Alexandre Sollaci — DOI: https://doi.org/10.5089/9798400224294.001 — Stock No: WPIEA2022221 — ISBN: 9798400224294 — ISSN: 1018-5941
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