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Time-varying wage Phillips curves in the euro area with a new measure for labor market slack

Dennis Bonam (), Jakob de Haan () and Duncan Van Limbergen ()

Economic Modelling, 2021, vol. 96, issue C, 157-171

Abstract: In recent years, the relationship between wage growth and the unemployment gap, known as the wage Phillips curve, has been puzzlingly weak: whereas the unemployment gap was low, wage growth was low as well. We consider two possible explanations for this ‘low wage growth puzzle’: (i) a structural change in the relationship between wage growth and labor market slack, and (ii) a failure of the unemployment gap to adequately capture labor demand conditions. We propose a new measure for labor market slack based on a survey among firms asking whether the shortage of labor is limiting production. This labor shortage indicator points to hidden slack not captured by the unemployment gap, which resolves the low wage growth puzzle. Our estimates of the wage Phillips curve for the five biggest euro area countries also suggest that the wage Phillips curve has changed over time, but not uniformly across countries.

Keywords: Wage Phillips curve; Labor shortage indicator; Time-varying parameters (search for similar items in EconPapers)
JEL-codes: E24 E31 E58 (search for similar items in EconPapers)
Date: 2021
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DOI: 10.1016/j.econmod.2020.12.027

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