Time-Varying Wage Phillips Curves in the Euro Area with a New Measure for Labor Market Slack

Abstract

Recently, the unemployment gap in the euro area has fallen markedly. However, wages increased less than predicted by traditional Phillips curves. Using Bayesian methods, we estimate the wage Phillips curve with time-varying parameters. We consider alternative measures for labor market slack, namely the unemployment gap and the European Commission's labor shortage indicator. Using the latter indicator, we find a steepening of the wage Phillips curve in Italy and France, and a stable Phillips curve in the Netherlands after the crisis. In Germany (Spain), both measures suggest a recent flattening (steepening) of the wage Phillips curve.

Keywords: Wage Phillips curve, Labor shortage indicator, Time-varying parameters

JEL Classification: E24, E31, E58