Price level dynamics, wages and distribution

Anne Martin, Hansjörg Herr and Michael Heine

No 234/2024, IPE Working Papers from Berlin School of Economics and Law, Institute for International Political Economy (IPE)

Abstract: Inflationary processes are closely linked to wage-price spirals - such spirals can be triggered by many factors, including natural resource price shocks, depreciation and inflationary demand. Empirically, the correlation between changes in nominal unit labour costs and the price level is strong for almost all OECD countries, at levels above 0.8. The clear policy conclusion is to make wages and the nominal exchange rate anchors for the price level, which implies that nominal wages should increase according to trends in productivity and the target inflation rate of the central bank. Wage developments without structural changes in the medium term have limited effects on functional income distribution on a macroeconomic level. The structural factors in question include the existence and spread of markets with monopolies, oligopolies and monopsonies as well as corporate governance systems and the power of trade unions to influence profit sharing in companies with rent.

Keywords: Wage-price spiral; inflation; functional distribution (search for similar items in EconPapers)
JEL-codes: E12 E31 E64 (search for similar items in EconPapers)
Date: 2024
New Economics Papers: this item is included in nep-mon
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