Non-Linearity between Price Inflation and Labor Costs: The Case of Central European Countries

Alena Pavlova ()
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Alena Pavlova: Institute of Economic Studies, Faculty of Social Sciences, Charles University, Prague, Czech Republic

No 2022/25, Working Papers IES from Charles University Prague, Faculty of Social Sciences, Institute of Economic Studies

Abstract: This article explores the relationship between labor costs and price inflation under two conditions. Firstly, with linear assumption and classical techniques. Secondly, without assuming linearity, by a novel non-parametric machine learning method, namely gradient boosting. With quarterly data from 1996 to 2022 for V4 countries, we find linear and non-linear dependency between labor cost and price inflation. However, the magnitude of the connection is country-specific and changes over time. Our findings indicate that a significant linear relationship between considered variables does not lead to the higher predictability power of labor cost in a non-parametric model, which predicts inflation. Even opposed, the Czech Republic, the country with the highest correlation between unit labor cost(ULC) and deflator, shows better prediction in a case when the ULC is not in the set of independent variables. This fact highlights the importance of non-linearity for the inflation model.

Keywords: inflation; labor cost; non-linear model; V4 countries (search for similar items in EconPapers)
JEL-codes: E24 E31 E37 (search for similar items in EconPapers)
Pages: 24 pages
Date: 2022-10, Revised 2022-10
New Economics Papers: this item is included in nep-big, nep-eec, nep-mon and nep-tra
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Persistent link: https://EconPapers.repec.org/RePEc:fau:wpaper:wp2022_25

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