Will inflation persist amid tight labor markets in CESEE?

Thursday, November 16, 2023, at 09:00-11:00 a.m. (CET)

Opening remarks
Prof. Dr. Robert Holzmann, Governor, Oesterreichische Nationalbank

Stephan Danninger
, Assistant Director, International Monetary Fund

Sebastian Weber
, Deputy Division Chief, International Monetary Fund
Julia Wörz, Head of CESEE Section, Oesterreichische Nationalbank
Piotr Lewandowski, President of the Board, Institute for Structural Research

Following two years of double-digit growth, headline inflation is finally receding. Nominal wages have not kept pace everywhere, leading to workers’ real wage loss and possible wage catch up in the making. But with unemployment at historical lows, there is a risk that too much wage growth could add to core inflation persistence. Together with structural changes, including older and declining labor forces and changing labor demand from new technologies and green jobs, this could constrain growth more broadly. This seminar discussed the drivers of wage growth, the shifts taking place in labor markets, and to which extent these trends could herald persistent inflation and weaker growth in countries of Central, Eastern, and Southeastern Europe (CESEE).

Governor Holzmann opened the seminar with a discussion of the challenges analysts and policymakers currently face in assessing inflation, wage, and labor market trends. He stressed the complications in drawing the right conclusion from recent labor markets developments given the multitude of cyclical and structural factors at play. The three presenters discussed the nexus between wage growth and inflation (Sebastian Weber), drivers of inflation dynamics in four CESEE countries (Julia Woerz), and structural labor market trends in the CESEE region, with a focus on Poland (Piotr Lewandowski). 

Weber underscored that despite ongoing monetary tightening, labor market softening has been mild, and unemployment rates are close to record lows. Recent wage growth appears driven by income catch-up and a response to second-round effects of cost shocks. Wage formation has a backward-looking component in CESEE countries, which could lead to sustained high wage growth. On balance, risks remain skewed toward more persistent inflation. Under adverse assumptions, this could delay reaching inflation targets to 2026, about one year later than in the baseline. Given these inflation risks, monetary and fiscal policies should be tight and structural policies should focus on increasing labor productivity and labor supply. Woerz presented the results of a study on inflation dynamics in the Czech Republic, Hungary, Poland, and Romania using a nonlinear Phillips-curve approach. Labor markets in these countries appear to exhibit non-linear and asymmetric effects, with larger shocks affecting inflation disproportionately more, and positive unemployment shocks reducing inflation less than negative unemployment shocks raise inflation. Woerz noted that the CESEE region’s chronically tight labor markets might impair the functioning of the Philips curve. Lewandowski underscored that CESEE countries already face, and/or will face, a labor supply squeeze from a declining labor force. This will require firms to adapt their strategies to expand business, which previously relied on the availability of qualified labor at comparatively low costs. He also stressed that a skills mismatch is likely to emerge in the region, with high demand for and relatively low supply of highly skilled workers, and conversely relatively high supply of and low demand for less skilled workers. This mismatch will not be easy to tackle, and it could cause income inequalities.

Hervé Joly, Director (JVI)


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