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Chapter 2: European Wage Dynamics and Labor Market Integration

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May 2018

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Chapter 2: European Wage Dynamics and Labor Market Integration

  1. 1. Regional Economic Outlook May2018 Chapter 2 European Wage Dynamics andLabor MarketIntegration E U R
  2. 2. Key Messages ✓ Improved labor markets across EU, yet divergent wage growth in EU-15 and EU New Member States ✓ Key factors driving wages: ✓ EU-15: Inflation and inflation expectations, and sluggish productivity ✓ NMS: tight labor markets and spillovers from integration in EU ✓ Pass-through from wages to inflation is relatively small ✓ Policies: ✓ In the euro area, continued commitment to raising inflation and inflation expectations to the inflation target ✓ In NMS, ramp up reforms to reduce skill mismatches and support labor force participation 2
  3. 3. Why Wages?
  4. 4. 4 Labor market conditions have improved appreciably in the EU Unemployment Rate (Percent, seasonally adjusted) EU15 NMS 4 5 6 7 8 9 10 11 12 13 2000:Q1 02:Q3 05:Q1 07:Q3 10:Q1 12:Q3 15:Q1 17:Q4 4 6 8 10 12 14 16 18 20 2001:Q4 03:Q4 05:Q4 07:Q4 09:Q4 11:Q4 13:Q4 15:Q4 17:Q4
  5. 5. 5 But wage growth is sluggish in the EU-15 and strong in NMS Nominal Wage Growth (Year over year percent change, four-quarter average) EU15 NMS 0 1 2 3 4 5 6 2000:Q1 02:Q3 05:Q1 07:Q3 10:Q1 12:Q3 15:Q1 17:Q4 -4 -2 0 2 4 6 8 10 12 14 16 2001:Q4 03:Q4 05:Q4 07:Q4 09:Q4 11:Q4 13:Q4 15:Q4 17:Q4
  6. 6. 6 In EU-15, slow wage growth partly due to low inflation and sluggish productivity GDP Deflator Inflation (Year over year percent change, four-quarter average) Trend Labor Productivity (Year over year percent change, four-quarter average) 0 1 2 3 4 5 6 2000:Q1 02:Q3 05:Q1 07:Q3 10:Q1 12:Q3 15:Q1 17:Q4 -0.5 0.0 0.5 1.0 1.5 2.0 2.5 3.0 2000:Q1 02:Q3 05:Q1 07:Q3 10:Q1 12:Q3 15:Q1 17:Q4
  7. 7. 7 In NMS, recent pick-up in wages coincides with firming up of inflation GDP Deflator Inflation (Year over year percent change, four-quarter average) Trend Labor Productivity (Year over year percent change, four-quarter average) -4 -2 0 2 4 6 8 10 12 14 16 2001:Q4 03:Q4 05:Q4 07:Q4 09:Q4 11:Q4 13:Q4 15:Q4 17:Q4 1 2 3 4 5 6 7 2001:Q4 03:Q4 05:Q4 07:Q4 09:Q4 11:Q4 13:Q4 15:Q4 17:Q4
  8. 8. 8 A variety of factors can affect wage growth, with different policy implications Wages Slack ProductivityInflation Wages Domestic factors External factors
  9. 9. 9 Key Questions 1 How important are traditional factors—productivity, slack, inflation—for wage dynamics? How do their roles differ across EU15 and NMS? 2 3 4 Given EU integration, how important are spillovers for wage dynamics? Is there more slack than just captured by headline unemployment rate? And what are their implications for wages? What are the implications of wages for inflation?
  10. 10. Some New Angles to Consider
  11. 11. 11 Extended measures of slack Unemployment and Additional Slack (Percent of active labor force) EU15 NMS 0 2 4 6 8 10 12 14 16 18 20 Unemployment Unemployment and additional slack 0 2 4 6 8 10 12 14 16 18 20
  12. 12. 12 European integration, creates spillovers in terms of labor supply 0 2 4 6 8 10 1990 95 2000 05 10 15 17 NMS to EU15 as percent of EU15 population NMS to EU15 as percent of NMS population Migration Stock (Percent of population)
  13. 13. 13 EU Integration also creates spillovers in terms of labor demand European Union integration into Global Supply Chains: Pan-European Supply Chains Sensitivity of Labor Shortage Indicator to External Conditions over time -1.0 -0.5 0.0 0.5 1.0 1.5 2001 03 05 07 09 11 13 15 17 NMS, 25th percentile NMS, 75th percentile EU15, 25th Percentile EU15, 75th Percentile NMS median
  14. 14. 14 Wage Dynamics: External versus Domestic Factors Variance Explained by Europe-wide, Group, and Country Factors (Percent) 0 10 20 30 40 50 60 70 80 90 100 EU15 NMS Europe Europe-wide Group Country
  15. 15. Analytical framework Bring all Factors Together
  16. 16. • Wage Phillips curve is used to assess short-run dynamics in nominal wages • Baseline wage Phillips Curve: Δlog 𝑁𝑊 = 𝑎1 Δlog 𝑇𝑟𝑒𝑛𝑑 𝑝𝑟𝑜𝑑𝑢𝑐𝑡𝑖𝑣𝑖𝑡𝑦 + 𝑎2 𝐼𝑛𝑓𝑙𝑎𝑡𝑖𝑜𝑛 + 𝑎3 𝑈𝑛𝑒𝑚𝑝 𝑔𝑎𝑝 • Extended measures of slack Δlog 𝑁𝑊 = 𝑎1 Δlog 𝑇𝑟𝑒𝑛𝑑 𝑝𝑟𝑜𝑑𝑢𝑐𝑡𝑖𝑣𝑖𝑡𝑦 + 𝑎2 𝐼𝑛𝑓𝑙𝑎𝑡𝑖𝑜𝑛 + 𝒂 𝟑 𝑵𝒐𝒏𝑼𝒏𝒆𝒎𝒑 𝒈𝒂𝒑 • Spillovers from foreign wages and slack, and migrant flows Δlog 𝑁𝑊 = 𝑎1 Δlog 𝑇𝑟𝑒𝑛𝑑 𝑝𝑟𝑜𝑑𝑢𝑐𝑡𝑖𝑣𝑖𝑡𝑦 + 𝑎2 𝐼𝑛𝑓𝑙𝑎𝑡𝑖𝑜𝑛 + 𝑎3 𝑁𝑜𝑛𝑈𝑛𝑒𝑚𝑝 𝑔𝑎𝑝 + +𝒂 𝟒 𝜟𝑬𝑨 𝑼𝒏𝒆𝒎𝒑 𝒓𝒂𝒕𝒆 + 𝒂 𝟓 𝜟𝐥𝐨𝐠 𝑬𝑨 𝑵𝑾 + 𝒂 𝟔 𝜟𝑴𝒊𝒈𝒓𝒂𝒏𝒕 𝒇𝒍𝒐𝒘𝒔 Analytical framework: Wage Phillips Curve
  17. 17. • Two groups of countries: • Selected EU15: Austria, Belgium, France, Netherlands, Spain • New Member States (NMS): Czech Republic, Estonia, Hungary, Lithuania, Latvia, Poland, Slovenia, Slovak Republic • Time span: quarterly 1995Q1-2017Q3 • Wage Measures: • Total compensation including wages and salaries, non-wage benefits, and social contributions • Wage and salaries; and Labor cost index for robustness checks. Sample
  18. 18. 18 The wage Phillips curve is alive and well: flat in selected EU-15 and steep in NMS Sources: IMF staff calculations. 1/ Based on a panel regression that uses a broad measure of slack (non-employment gap). Selected EU-15 comprise Austria, Belgium, France, Germany, Netherlands, and Spain. Wage Phillips Curve: New Member States 1/Wage Phillips Curve: Selected EU-15 1/ Wagegrowth Unemployment gap Slope = -0.4 Wagegrowth Unemployment gap Slope = -0.9
  19. 19. 19 In selected EU-15, low inflation, labor slack, and sluggish productivity are weighing on wage Contributions to Wage Growth: Selected EU-15, 2017 (Percentage point) Source: IMF staff calculations. -1.0 -0.5 0.0 0.5 1.0 1.5 2.0 Inflation Residual and other Domestic slack Productivity Actual wage growth
  20. 20. For some smaller countries in EU15, long-run spillovers from France and Germany are significant 0.0 0.2 0.4 0.6 0.8 1.0 1.2 Austria Netherlands Belgium Productivity Spillover from Germany Spillover from France Long-run Wage Relationship (Elasticity coefficient)
  21. 21. 0 1 2 3 4 5 6 7 1 Spillover Inflation Productivity Slack Residual and other 21 In NMS, tight labor markets and spillovers from EU integration will push wages up Source: IMF staff calculations. New Member States: Contributions to Wage Growth, 2017 (Percentage point) Inflation Actual wage growth
  22. 22. Passthrough of Wages to Inflation
  23. 23. • VAR model: 𝑌𝑡 = 𝑎0 + 𝐴1 𝑌𝑡−1 + 𝐴2 𝑌𝑡−3 + … + 𝐴 𝑝 𝑌𝑡−𝑝 + 𝜀𝑡 , where 𝑌𝑡= {Import prices, wages adjusted for trend productivity, inflation, unemployment gap}. • Identification: Cholesky identification with the variables ordered as above. • Multivariate: assess the passthrough of wages to prices while controlling for endogenous feedback effects with prices and slack. • Dynamic: assess the dynamic impact of wages on inflation. • Estimation: As a panel separately for EU15 and NMS. Analytical framework: Vector autoregression (VAR) model
  24. 24. 24 Passthrough from Wages to Inflation: Dynamic profile Impulse Response of Inflation to a Wage Shock: EU15 (Percentage points) Source: IMF staff calculations. -0.10 -0.05 0.00 0.05 0.10 0.15 0.20 1 2 3 4 5 6 7 8 9 1011121314151617181920 Quarters -0.10 -0.05 0.00 0.05 0.10 0.15 0.20 1 2 3 4 5 6 7 8 9 1011121314151617181920 Quarters Impulse Response of Inflation to a Wage Shock: NMS (Percentage points)
  25. 25. 25 Passthrough from wages to inflation, while positive, is relatively modest Cumulative Impulse Response to a Wage Shock (Three years cumulative, percentage points) Source: IMF staff calculations. Pass through Ratio of Wages to Inflation (Three years cumulative, percent) 0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0 EU15 NMS Inflation Wage 0 5 10 15 20 25 30 EU15 NMS
  26. 26. Conclusions and Policy Implications ✓ The wage Phillips curve appears alive and well; broadly stable; flatter in EU-15 ✓ Key factors driving wages: ✓ EU-15: Inflation and inflation expectations, and sluggish productivity ✓ NMS: tight labor markets and spillovers from integration in EU ✓ Pass-through from wages to inflation is relatively small ✓ Policies: ✓ In the euro area, continued commitment to raising inflation and inflation expectations to the inflation target ✓ In NMS, ramp up reforms to reduce skill mismatches and support labor force participation 26
  27. 27. Thank You
  28. 28. Appendix
  29. 29. 29 Wage growth is weaker than pre-crisis and divergent in EU-15 and NMS Source: Eurostat. 0 2 4 6 8 10 12 14 16 2001Q4 2005Q4 2009Q4 2013Q4 2017Q4 New member states EU-15 Nominal Wage Growth (Percent change y/y in four-quarter averages)
  30. 30. 30 Real wages and productivity: EU15 Real Product Wage Growth (Year over year percent change, four-quarter average) Real Wage/Trend Labor Productivity (Index; average for 2000–17 = 100) -2 -1 0 1 2 3 2000:Q1 02:Q3 05:Q1 07:Q3 10:Q1 12:Q3 15:Q1 17:Q4 97 98 99 100 101 102 103 104 2000:Q1 02:Q3 05:Q1 07:Q3 10:Q1 12:Q3 15:Q1 17:Q4
  31. 31. 31 Real wages and productivity: NMS Real Product Wage Growth (Year over year percent change, four-quarter average) Real Wage/Trend Labor Productivity (Index; average for 2000–17 = 100) -4 -2 0 2 4 6 8 10 2001:Q4 03:Q4 05:Q4 07:Q4 09:Q4 11:Q4 13:Q4 15:Q4 17:Q4 93 94 95 96 97 98 99 100 101 102 103 104 105 106 107 108 2001:Q403:Q4 05:Q4 07:Q4 09:Q4 11:Q4 13:Q4 15:Q4 17:Q4
  32. 32. 32 Germany: Decomposition of wage growth in 2017 Contributions to Wage Growth: Germany, 2017 (Percentage point) Source: IMF staff calculations. -0.5 0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 Domestic slack Residual and other Inflation Productivity Actual wage growth
  33. 33. 33 Passthrough from wages to inflation, while positive, is relatively modest. Impulse Response of Inflation to a unit Wage Shock (Percentage point, cumulative) 0.0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 1.0 EU15 NMS On impact 1 year 3 years

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