DoRisingLaborCostsTriggerHigherInflation.pdfVIP

September 1997 Volume 3 Number 11 Do Rising Labor Costs Trigger Higher Inflation? David A. Brauer The evidence that developments in compensation growth lead overall CPI inflation has thus far been inconclusive. This study, however, sheds new light on the relationship between labor costs and price inflation. By breaking down compensation and prices into their various components, the author finds that compensation growth in the service-producing segment of the private sector can help predict prices for a specific group of services. Policymakers have followed with great interest the that compensation growth in the service-producing search for a reliable early indicator of inflation. One segment of the private sector can help predict prices for measure that has received considerable attention is the a specific group of services and that these prices can in changes in hourly compensation—wages and bene- turn help predict movements in goods prices. However, fits—of workers. On average, compensation represents compensation growth among goods producers in the about two-thirds of the total cost of production, and private sector is shown to have little predictive power economic theory suggests that an increase in the rate of for goods prices. Overall, these results suggest that by compensation growth will lead to accelerating price concentrating on compensation developments in pri- inflation unless the increase is offset by greater produc- vate sector services, we can obtain important informa- tivity growth or a squeeze on profits. tion about the future path of inflation. Throughout the 1990s, both the employment cost Previous Studies of Labor Costs and Inflation index (ECI)—which measures the rate of change in Several economists have attempted to