The wage-price pass-through across sectors: evidence from the euro area

Summary

Focus

With the surge of inflation in 2021, wage developments also came to the fore. Surprise inflation first eroded real purchasing power and then prompted central banks and observers to ask whether wage increases were on the horizon. These could affect the persistence of inflation and make the "last mile" of disinflation more challenging. So the link between wages and prices, the so-called wage-price pass-through, is a key element for understanding inflation developments.

Contribution

We examine the pass-through from wages to producer prices in the euro area using sectoral disaggregated data. We also investigate the causes of a different wage-price pass-through across sectors by relating it to their labour intensity as well as to various aspects of their exposure to international competition. Our results shed light on the sectoral dimension of inflation and on its overall persistence.

Findings

We find a sizeable wage-price pass-through: it stabilises at around 50% after two to three years. We also find considerable differences across sectors: the wage-price pass-through is significantly larger in the private services sector than in the industry sector and takes longer to fully unfold. The wage-price pass-through is larger in the most labour-intensive sectors. Yet differences in sectoral labour shares alone cannot explain the larger wage-price pass-through in private services. Instead, our estimates suggest an important role for international competition in the tradeable sector.

Abstract

This paper studies the pass-through from wages to producer prices using sectoral disaggregated data for the euro area. We find a positive and statistically significant wage-price pass-through that reaches 50% after three years, which differs across sectors. The wage-price pass-through in private services is significantly higher than in industry and takes longer before reaching its peak. While a higher labour intensity is a key component of the pass-through, our estimates indicate that differences in sectoral labour shares alone cannot explain the larger wage-price pass-through in private services compared to industry. Instead, the estimates hint at an important role for international competition in the domestic market for the tradeable sector. They also suggest that the sales destination matters: wage growth contributes to domestic inflation for goods but not to export inflation. Finally, we also provide evidence of an increase in the wage-price pass-through after 2020, particularly in private services.

JEL Classification: E24, E31

Keywords: inflation dynamics, wage-price pass-through, sectors, international competition