Wage inflation is all the rage

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Wages are ‘back in vogue’

Wage inflation has shot up the dashboard of economic indicators followed by G4 policy makers and investors in recent months. This week’s Global Economics Weekly looks at the historical relationship between wage inflation, price inflation and measures of labour market slack in an attempt to disentangle whether prices or wages provide the more accurate read on the state of the economy.

Wage inflation has been unusually weak in the recovery

We show that nominal wage inflation since the Global Financial Crisis (GFC) has been unusually weak relative to its historical relationship with price inflation. This is especially true for the US and the UK. We demonstrate that wage inflation historically – especially over a more recent sample – has been a more precise and robust indicator of labour market slack than price inflation. This validates, to a certain extent, the increased weight placed on wage inflation recently by policy makers and investors.

A tighter link with slack

Despite the tighter link between unemployment and wages, we find that wage inflation outcomes in the US, the UK and the Euro area have been subdued. This supports the notion of greater slack in the economy relative to other measures of strengthening activity. Moreover, to achieve sustainable gains in wage inflation, alongside continued gains in employment, would require improvements in post-crisis labour productivity.

Click here to read the full research Global Economics Weekly – 24 September.

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