The paper analyses the empirical relation (pass-through) between wage dynamics and core inflation in the euro area. The analysis is based on a multivariate model which includes the main macroeconomic variables (real GDP, consumer prices net of food and energy, compensation per employee, labour productivity, unemployment rate and a measure of monetary policy stance).
The estimates suggest that the transmission of wage dynamics to consumer prices is incomplete and depends on the nature of the shocks hitting the economy. In the two years 2017-18, wage growth received significant support from the expansionary monetary policy, which implies on average a weaker pass-through to prices, and was associated with a reduction in firms’ profit margins; the contribution of aggregate demand was instead limited.
