Missing wage growth in the euro area: is the wage Philips curve non-linear?

David Byrne and Zivile Zekaite

No 9/EL/18, Economic Letters from Central Bank of Ireland

Abstract: This Letter examines the relationship between wage growth and labour market tightness in the euro area, frequently represented by the Phillips curve. It predicts that falling unemployment should lead to greater wage growth. A key question for policymakers post-crisis is whether this relationship has changed or broken down. We show that the euro area wage Phillips curve is non-linear. When labour market slack is elevated, tightening does not lead to greater wage growth. The relationship only returns when slack is at lower levels. This finding explains why wage growth did not increase when the labour market tightened between 2013 and 2016, and why stronger wage growth has been evident since 2017.

Date: 2018-11
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