Hi! Author here. This was actually my second article on wages and inflation (the first one can be found on my site - Dec 4, 2022 - Wages and Inflation). The mai

Hi! Author here. This was actually my second article on wages and inflation (the first one can be found on my site - Dec 4, 2022 - Wages and Inflation). The main theoretical work behind this actually work done by Oliver Blanchard (1985). From that post: "Another influential paper was Blanchard (1985). In this paper, Blanchard argued that in a setting where an increase in overall demand reduces unemployment, firms will have to compete for workers by offering higher wages, which will force them to increase their desired mark-up, pushing up prices of goods. With higher prices of goods, real wages of workers (i.e. the actual amount of goods workers can buy) fall, thus pushing them to demand higher wages. In a staggered negotiation situation, where these negotiations happen repeatedly (i.e. month-to-month) rather than in a world where wages and prices adjust immediately, inflation can persist for a long time. Due to the simplicity and logical appeal of this theory, it has been heavily tested empirically. Most empirical studies to date suggest, however, that wages do not cause1 inflation. Schwerzer and Hess (2000) from the Cleveland Federal Reserve did an overview of the economic research at the time and found very little evidence supporting the idea that wages cause inflation. Only one study showed a causal impact2, while three others, and Schwerzer’s and Hess’ own work were not able to find this causality. The reason for the ambiguity in results is because inflation and wages move so closely together that attempting to separate and isolate which one causes which is not straightforward to do. Their own work focused solely on establishing the direction of causality, using what is called in economics and statistics “Granger causality”, which is a test whether the future values of one time series3 (inflation in our case) can be predicted by past values of another time series (nominal wage growth) and vice-versa. The review and analysis conducted by Schwerzer and Hess suggests that increasing wages do not cause inflation. On the contrary, evidence likely points to inflation driving increased wages." So I would say so far the preponderance of evidence suggests there is unlikely to be causality of wage growth on inflation. Multiple methods have shown the causal link is unlikely. However, it is true that if wages didn't rise (that is workers would take real pay cuts) then inflation would fall, which is the main channel central bank interest rate hikes work to reduce inflation. What is more important in the current inflationary surge, is that the behavior of wages is entirely consistent with previous similar historic inflationary episodes. If anything, they're actually a bit lower than in the past. The focus on wage growth as a concern is not warranted at these levels.