A Measure of Core Wage Inflation

Almuzara, Martín; Audoly, Richard; Melcangi, Davide

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A Measure of Core Wage Inflation

Abstract: We recover the persistent (“core”) component of nominal wage growth over the past twenty-five years in the United States. Our approach combines worker-level data with time-series smoothing methods and can disentangle the common persistence of wage inflation from the persistence specific to some subgroup of workers, such as workers in a specific industry. We find that most of the business cycle fluctuations in wage inflation are persistent and driven by a common factor. This common persistent factor is particularly important during inflationary periods, and it explains 80 to 90 percent of the post-pandemic surge in wage inflation. Contrary to standard measures of wage inflation, the persistent component of wage inflation contemporaneously co-moves with labor market tightness.

Keywords: wage inflation; persistence; factor models;

JEL Classification: C33; E24;