Finance and Economics Discussion Series (FEDS)

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June 2015

The Passthrough of Labor Costs to Price Inflation

Ekaterina V. Peneva and Jeremy B. Rudd

Abstract:

We use a time-varying parameter/stochastic volatility VAR framework to assess how the passthrough of labor costs to price inflation has evolved over time in U.S. data. We find little evidence that changes in labor costs have had a material effect on price inflation in recent years, even for compensation measures where some degree of passthrough to prices still appears to be present. Our results cast doubt on explanations of recent inflation behavior that appeal to such mechanisms as downward nominal wage rigidity or a differential contribution of long-term and short-term unemployed workers to wage and price pressures.

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Keywords: Prices, business fluctuations, and cycles, wages, and compensation

DOI: http://dx.doi.org/10.17016/FEDS.2015.042

PDF: Full Paper

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Last Update: June 19, 2020