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© 2022 International Monetary Fund
WP/22/221
IMF Working Paper
Research Department
Wage-Price Spirals: What is the Historical Evidence?
Prepared by Jorge Alvarez, John Bluedorn, Niels-Jakob Hansen, Youyou Huang, Evgenia Pugacheva, and Alexandre Sollaci
Authorized for distribution by Daniel Leigh
November 2022
IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.
ABSTRACT: How often have wage-price spirals occurred, and what has happened in their aftermath? We investigate this by creating a database of past wage-price spirals among a wide set of advanced economies going back to the 1960s. We define a wage-price spiral as an episode where at least three out of four consecutive quarters saw accelerating consumer prices and rising nominal wages. Perhaps surprisingly, only a small minority of such episodes were followed by sustained acceleration in wages and prices. Instead, inflation and nominal wage growth tended to stabilize, leaving real wage growth broadly unchanged. A decomposition of wage dynamics using a wage Phillips curve suggests that nominal wage growth normally stabilizes at levels that are consistent with observed inflation and labor market tightness. When focusing on episodes that mimic the recent pattern of falling real wages and tightening labor markets, declining inflation and nominal wage growth increases tended to follow – thus allowing real wages to catch up. We conclude that an acceleration of nominal wages should not necessarily be seen as a sign that a wage-price spiral is taking hold.
RECOMMENDED CITATION: Alvarez, Jorge, John Bluedorn, Niels-Jakob Hansen, Youyou Huang, Evgenia Pugacheva, and Alexandre Sollaci. 2022. “Wage-Price Spirals: What is the Historical Evidence?” IMF Working Paper 22/221, International Monetary Fund, Washington, DC.
| JEL Classification Numbers: | E31, E24 |
| Keywords: | Inflation; Wages; Wage-price spirals; Labor markets. |
| Author’s E-Mail Address: | jalvarez@imf.org, jbluedorn@imf.org, nhansen@imf.org, yhuang4@imf.org, abalduinosollaci@imf.org, epugacheva@imf.org. |
| JEL Classification Numbers: | E31, E24 |
| Keywords: | Inflation; Wages; Wage-price spirals; Labor markets. |
| Author’s E-Mail Address: | jalvarez@imf.org, jbluedorn@imf.org, nhansen@imf.org, yhuang4@imf.org, abalduinosollaci@imf.org, epugacheva@imf.org. |
Title Page
WORKING PAPERS
Wage-Price Spirals: What is the Historical Evidence?
Prepared by Jorge Alvarez, John Bluedorn, Niels-Jakob Hansen, Youyou Huang, Evgenia Pugacheva, and Alexandre Sollaci1
Contents
1. Introduction
2. Data
3. Historical Experiences
4. A Historical Decomposition through the Lens of a Wage Philips Curve
5. A look at Episodes Similar to the COVID-19 Shock
6. Conclusion
Annex
References
FIGURES
Figure 1.1: Recent Behavior of Price and Nominal Wage Indices
Figure 3.1: Share of counties with accelerating prices and wages
Figure 3.2: Changes in Macroeconomic Variables after Past Episodes with Accelerating Prices and Wages
Figure 4.1: Average decomposition of wage growth across episodes with accelerating prices and wages.
Figure 5.1: Changes in Macroeconomic Variables after Episodes Similar to 2021
Figure 5.2: Average Decomposition of Wage Growth after Episodes Similar to 2021
TABLES
Table 2.1. Variable Description
Table 3.1. Data Sample for Historical Episodes
Table 3.2. Past Periods with Accelerating Wages and Prices
Table 3.1 Wage Phillips Curve Estimation
Table 5.1. Similar Past Episodes
Table A.1. Economies in Sample
Table A.2. Samples by Empirical Excercise
Table A.3. Data Coverage (Quarters Between 1960:Q1 and 2021:Q4
Table A.4. Past Periods with Accelerating Wages and Prices
We are grateful to Petya Koeva Brooks, Daniel Leigh, and Pierre-Olivier Gourinchas for invaluable guidance and support. We also thank Silvia Albrizio, Olivier Blanchard, Allan Dizioli, Fah Jirasavetakul, Frederik Toscani, staff at National Bank of Belgium, and seminar participants at the IMF for their helpful comments and suggestions.