Solving the Wage Puzzle: Does the “Non-Employment Index” Explain European Wage Dynamics Since the Global Financial Crisis?

Stephen Byrne and Shayan Zakipour-Saber
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Shayan Zakipour-Saber: Central Bank of Ireland

No 05/RT/20, Research Technical Papers from Central Bank of Ireland

Abstract: Contrary to the predictions of the traditional Phillips curve model, the euro-area experienced subdued wage growth despite a tightening labour market during the period 2013 to 2017. This has led to a debate around whether the standard unemployment rate, or indeed currently used broader measures, adequately capture the level of labour slack in an economy. In this paper, we construct a measure of labour market slack for twelve European countries, the Non-Employment Index (NEI). The NEI weighs each group outside the labour force by their relative probability of transitioning into employment. Using pseudo out-of-sample conditional forecasts, we show that the NEI is a better predictor of wage dynamics during the period 2013-2017 than other traditional measures of slack in countries exposed to the european sovereign debt crisis. The improvement is seen both in terms of point and density forecasts. We confirm this result in a panel framework, controlling for expectations, external factors, and productivity.

JEL-codes: E37 J21 J30 (search for similar items in EconPapers)
Date: 2020-07
New Economics Papers: this item is included in nep-lma and nep-mac
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