The Passthrough of Labor Costs to Price Inflation

FEDS Working Paper No. 2015-042

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

33 Pages Posted: 28 Jun 2015

See all articles by Ekaterina Peneva

Ekaterina Peneva

Board of Governors of the Federal Reserve System

Jeremy B. Rudd

Board of Governors of the Federal Reserve System

Multiple version iconThere are 2 versions of this paper

Date Written: May 21, 2015

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.

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

JEL Classification: E24, E31

Suggested Citation

Peneva, Ekaterina and Rudd, Jeremy B., The Passthrough of Labor Costs to Price Inflation (May 21, 2015). FEDS Working Paper No. 2015-042, http://dx.doi.org/10.17016/FEDS.2015.042, Available at SSRN: https://ssrn.com/abstract=2623674 or http://dx.doi.org/10.2139/ssrn.2623674

Ekaterina Peneva

Board of Governors of the Federal Reserve System ( email )

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Jeremy B. Rudd (Contact Author)

Board of Governors of the Federal Reserve System ( email )

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Washington, DC 20551
United States
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202-452-3819 (Fax)

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