This is the most recent title SF Fed Economic Lettergo through Ruben Glick, Sylvain Leducand Molly Pepper.
Households currently expect inflation to be high in the short term but remain subdued in the more distant future. Given this difference, what role do short- and long-term household inflation expectations play in determining workers’ expectations of future wages? The data show that wage inflation is sensitive to changes in households’ short-term inflation expectations, but not to long-term inflation expectations. This points to an upside risk to inflation as workers negotiate higher wages that businesses can pass on to consumers by raising prices.
This is a very clear way of thinking about whether and how wages will respond to the development and determinants of inflation.It also reminds us that AW Phillips’ original paper was about nominal wages, or “The relationship between unemployment and the rate of change in the money wage rate in Great Britain, 1861-1957” Economy (1958).
Glick et al.Estimate the Phillips curve using
“… quarterly data from the second quarter of 1980 to the first quarter of 2022. We measure wages using the wage and salary components of the Employment Cost Index compiled by the BEA, with data starting in the first quarter of 1980. This measure accounts for the labor force Changes in composition, which may affect wage growth separate from the wage Phillips curve. Inflation rates for wages and core prices are measured as annual (logarithmic) changes in each quarter.”
and obtain the estimated impact on wage inflation of a 1% change in the following variables (Figure 3 from the letter):
Figure 3: Impact of a 1% Change in Variable on Wage Inflation from Glick et al. (2022).
Interestingly, the original Phillips curve paper is still useful reading; although it does not directly incorporate long-term inflation expectations, nor does it consider the composition of labor demand effects, it does point to the importance of actual and expected inflation (and productivity) .
The author concludes:
The rise in short-term expectations since last spring points to an important upside risk to inflation as workers negotiate higher wages that businesses may pass on to consumers in the form of higher prices. By reducing aggregate demand, continued monetary policy tightening will help reduce the likelihood that this risk will materialize.
Having said that, the productivity data following the analysis by Glick et al. Cost and productivity releasewould certainly complicate the outlook for managing inflation, even if we take into account possible revisions to productivity growth (see e.g., Furman and Powell, 2022).
(Note: If you don’t like to use natural logs – e.g. here Here – take your eyes off this paper and the Phillips paper!this means Steven Kopitz, James Sexton, ETC. )
