Economic Letter: Missing wage growth in the euro area - is the wage Phillips curve non-linear?

An Economic Letter (PDF 916.96KB)by David Byrne and Zivile Zekaite examines the relationship between wage growth and labour market tightness in the euro area. Using a Phillips curve framework, the paper sheds light on a period of disappointing wage growth between 2013 and 2016, and a period of stronger wage growth since 2017.

The key findings are:

• When labour market slack is elevated, tightening does not lead to greater wage growth. The relationship only returns when slack is at lower levels. This means that the euro area wage Phillips curve is non-linear.
• In addition to standard measures of labour market slack, underemployment of euro area workers plays a significant role in explaining wage dynamics.
• Since 2017, the levels of slack in the euro area labour market have been consistent with stronger wage growth, which can be expected to pass through to stronger inflation.

The views presented in Economic Letters are those of the authors and do not necessarily represent the official views of the Central Bank of Ireland.

Library of Economic Letters