Earnings growth under high inflation

Laura Boyd, Enda Keenan and Tara McIndoe-Calder
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Laura Boyd: Central Bank of Ireland
Tara McIndoe-Calder: Central Bank of Ireland

Quarterly Bulletin Articles, 2023, 89-123

Abstract: The Irish economy is currently experiencing a tight labour market and high inflation. Using the framework of the Phillips curve – which relates changes in wages to labour market tightness and inflation - we find that since 2018, nominal earnings growth has been lower than this model would predict. The gap between observed and estimated earnings growth based on the Phillips curve widened to 1.3 percentage points in 2022. Our analysis finds that this gap most likely reflects a delayed catch-up of wages to the sharp drop in real incomes in 2022. Fiscal supports and savings may also have contributed to dampening wage pressures by providing temporary cushioning to households. Our results suggest that a degree of real wage catch up is likely over the medium term. However, with the economy now operating at full capacity, it is important that the fiscal stance does not add further stimulus to the economy.

Date: 2023-09
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