Abstract

This paper investigates the effect of wage inflation on price inflation and vice versa, using industry-level data from Israel for identification. Various methodologies are employed to evaluate the wage inflationary effect, which yield consistent estimates of the pass-through from wage to price inflation. The findings suggest that a 10% increase in monthly wages is associated with a 1%-3% cumulative rise in prices a year ahead, an effect that gradually decreases in the following months. The analysis is extended to include the reversed effect of headline inflation on wages, thereby completing the wage-price spiral perspective. I find that within a year wages slowly adjust to catch up with an inflation shock. Lastly, the paper presents some evidence of a stronger relationship during the aftermath of the COVID-19 pandemic, albeit with considerable uncertainty. To a certain degree, the results indicate that labor market inflationary pressures may be higher than previously thought.

 

JEL Classification: E24, E31

Keywords: Wage-price spiral, pass-through, inflation dynamics.

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