Sectoral wage shock and inflation in the euro area

Áron Kiss, Giulia Maravalli, Matteo Salto and Kristine Van Herck

Quarterly Report on the Euro Area (QREA), 2024, vol. 23, issue 1, 41-54

Abstract: This chapter analyses how shocks to nominal wages affect consumer prices when taking into account the sectoral structure of the economy. Sectoral interlinkages of the economy are accounted for by using an input-output model. The chapter shows that, on top of their direct impact on production prices, wage increases may also have a sizeable second round indirect impact on prices via their effect on the cost of intermediate inputs. Moreover, a wage shock in a specific sector can have a very different impact on inflation depending on not only the sector’s labour intensity but also its position in the production chain; sectors that provide more inputs to the rest of the economy have a larger impact, other things being equal. Measures of stress in the labour market, like the vacancy rate, currently seem correlated with wage growth and are relatively concentrated in sectors somewhat upstream in the production chain. This means that, if wages grow faster in sectors with higher vacancy rates, this may result in relatively stronger inflationary dynamics than if wages increased by the same rate in all sectors. However, the magnitude of the effects suggests that a gradual recovery of real wages is consistent with a continuation of gradual disinflation in the euro area as productivity increases and unit profits decline

Keywords: euro area; input-output; labour market; inflation; price-wage spiral; wages (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:euf:qreuro:0231-03

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