Wage Growth and Inflation in Europe: A Puzzle?

IMF Working Papers, December 20, 2019

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Authors: Vizhdan Boranova, Raju Huidrom, Sylwia Nowak, Petia Topalova, Volodymyr Tulin, Richard Varghese
Published: December 20, 2019
Series: IMF Working Papers
DOI: https://doi.org/10.5089/9781513521275.001

Wages have been rising faster than productivity in many European countries, while signs of underlying consumer price pressures remain limited.
The paper examines the historical link between wage growth and inflation in Europe and the 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 indicates the passthrough from wage growth to inflation is significantly lower in the following conditions:
- Periods of subdued inflation and subdued inflation expectations.
- Periods of greater competitive pressures.
- Periods of robust corporate profitability.
Conclusion drawn: the recent pickup in wage growth is likely to have a more muted impact on inflation than in the past.

Rising wages do not necessarily imply a strong near-term rise in consumer price inflation given weakened wage-inflation transmission since 2009.
Policy assessments of inflation risk from labor cost increases should account for:
- Current inflation and inflation expectations dynamics.
- Degree of competition in product markets.
- Corporate profitability conditions.

Authors: Vizhdan Boranova, Raju Huidrom, Sylwia Nowak, Petia Topalova, Volodymyr Tulin, Richard Varghese
Date: December 20, 2019
Series: IMF Working Papers; Working Paper No. 2019/280
Pages: 40
DOI: https://doi.org/10.5089/9781513521275.001

Source: IMF Working Paper “Wage Growth and Inflation in Europe: A Puzzle?” by Vizhdan Boranova et al., December 20, 2019.