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INFLATION STUBBORNESS IN EMU : ARE WAGES TO BLAME ?

INFLATION STUBBORNESS IN EMU : ARE WAGES TO BLAME ?. ‘STICKY’ INFLATION FROM 2000 ONWARDS. …in contrast with past slowdowns. Negotiated wages. BACKGROUND : Promise of EMU. Background : Falling wage share in GDP. Background : Restored profitability (‘60—’72 equals index 100).

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INFLATION STUBBORNESS IN EMU : ARE WAGES TO BLAME ?

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  1. INFLATION STUBBORNESS IN EMU : ARE WAGES TO BLAME ?

  2. ‘STICKY’ INFLATION FROM 2000 ONWARDS

  3. …in contrast with past slowdowns

  4. Negotiated wages

  5. BACKGROUND : Promise of EMU

  6. Background : Falling wage share in GDP

  7. Background : Restored profitability(‘60—’72 equals index 100)

  8. TOTAL WAGES : Negotiated wages + wage drift + or – taxes) (COMPENSATION PER HEAD)

  9. UNIT WAGE COSTS….

  10. … explained by setbacks in growth of labour productivity

  11. US – experience : Supporting growth is good for price stability

  12. US experience

  13. Wages and inflation : A rule of thumb • Nominal unit wage costs in line with the price stability target • In that case : • Real wages are in line with productivity • Wage compensation for inflation equals ECB’s inflation obejective • No pressure on profit margins • No wages and prices running after each other’s tail

  14. APPLYING THE RULE OF THUMB

  15. If ‘levels’ of wage increase in line with price stability, what about its small-reaction to the growth slowdown ?

  16. One explanation : Wages as the victim of ‘succesful’ wage moderation ?

  17. Another explanation • With inflation already at an historical low, the ‘Keynesian’ downwards nominal wage rigidity may ‘bite’. • What mandat for a central bank ?

  18. Implications for monetary policy • Watch out for the deflation trap ! • Instead, support growth and employment while keeping price stability by riding the Philips curb

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