Wage growth and inflation in Europe: a puzzle?

Vizhdan Boranova, Raju Huidrom, Sylwia Nowak, Petia Topalova, Volodymyr Tulin and Richard Varghese

Oxford Economic Papers, 2021, vol. 73, issue 4, 1427-1453

Abstract: In many European countries, prior to the pandemic, wages rose faster than productivity, yet consumer price pressures remained subdued. This is puzzling as theory suggests that inflation would pick up with a rise in wage growth that exceeds productivity growth. To shed light on this puzzle, we analyze the transmission of wage shocks to core inflation for a sample of 27 European countries over the period 1995Q1–2019Q1. More importantly, we assess how the transmission depends on a set of factors. We find that historically wage growth has led to higher inflation but the impact has weakened since the global financial crisis. Our analysis shows that the passthrough from wage growth to inflation is significantly lower in periods of subdued inflation and inflation expectations, greater competitive pressures, and robust corporate profitability.

JEL-codes: E24 E31 (search for similar items in EconPapers)
Date: 2021
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Citations: View citations in EconPapers (4)

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Working Paper: Wage Growth and Inflation in Europe: A Puzzle? (2019)
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