Determinants of Inflation in the Euro Area:
The Role of Labour and Product Market
Institutions
by Florence Jaumotte and Hanan Morsy
Discussion by
Marco Hoeberichts
• Paper relates inflation in the Euro area to
institutional features in labour market and in
product market.
• Focus is on labour market institutions
• Good reasons for looking at labour market
• IPN has concluded that
• Inflation persistence is more prevalent in
service sector, where wages determine
(marginal) costs
• Inflation inherits most of its persistence from
persistence in real marginal costs.
• Indicators:
• Union density
• EPL
• Level of wage bargaining coordination
Information on indexation is missing
Data from WDN
What is the mechanism?
• In your specification, structural indicators affect
inflation through impact on
• (i) inflation persistence
• (ii) the response of inflation to the output gap
• (iii) the response of inflation to common shocks
What is the mechanism?
• Why not through the output gap itself?
• Maybe this is because output gap is cyclical
indicator, not structural.
• But persistence of the output gap is structural.
• More generally, dynamics of the output gap
are driven by labour market rigidities.
Adjustment of prices in response to cost shocks
Cost shock
Wage shock
Increase price
Reduce costs
Increase price
Reduce costs
Competition (dummy)
-0.0182
(0.0119)
0.0375***
(0.0113)
-0.0296**
(0.0125)
0.0292**
(0.0118)
Share of foreign sales
-0.0048
(0.0181)
0.0550***
(0.0186)
-0.0609***
(0.0194)
0.0458**
(0.0193)
-0.103***
(0.0266)
-0.0747***
(0.0271)
0.117***
(0.0294)
-0.0492*
(0.0290)
Collective agreement, higher level
(dummy)
0.0247*
(0.0138)
0.0136
(0.0139)
0.0390**
(0.0155)
0.0066
(0.0151)
Collective agreement, firm level
(dummy)
-0.0046
(0.0116)
0.0128
(0.0119)
-0.0217*
(0.0126)
0.0210
(0.0130)
Share of foreign sales X Non-EA
-0.0632**
(0.0315)
-0.0458
(0.0311)
-0.0655**
(0.0329)
-0.0453
(0.0308)
Labour share X Non-EA
0.0229
(0.0507)
0.0633
(0.0497)
0.0412
(0.0497)
0.1140**
(0.050)
Observations
McFadden’s Pseudo- R²
Log-likelihood
Observed frequency
Predicted frequency
11123
0.088
-6572.1
0.650
0.660
11004
0.080
-6482.3
0.661
0.676
10336
0.097
-6309.4
0.592
0.598
10010
0.149
-5808.3
0.574
0.578
Labour share
Adjustment of prices in response to cost shocks
Cost shock
Wage shock
Increase price
Reduce costs
Increase price
Reduce costs
Competition (dummy)
-0.0182
(0.0119)
0.0375***
(0.0113)
-0.0296**
(0.0125)
0.0292**
(0.0118)
Share of foreign sales
-0.0048
(0.0181)
0.0550***
(0.0186)
-0.0609***
(0.0194)
0.0458**
(0.0193)
-0.103***
(0.0266)
-0.0747***
(0.0271)
0.117***
(0.0294)
-0.0492*
(0.0290)
Collective agreement, higher level
(dummy)
0.0247*
(0.0138)
0.0136
(0.0139)
0.0390**
(0.0155)
0.0066
(0.0151)
Collective agreement, firm level
(dummy)
-0.0046
(0.0116)
0.0128
(0.0119)
-0.0217*
(0.0126)
0.0210
(0.0130)
Share of foreign sales X Non-EA
-0.0632**
(0.0315)
-0.0458
(0.0311)
-0.0655**
(0.0329)
-0.0453
(0.0308)
Labour share X Non-EA
0.0229
(0.0507)
0.0633
(0.0497)
0.0412
(0.0497)
0.1140**
(0.050)
Observations
McFadden’s Pseudo- R²
Log-likelihood
Observed frequency
Predicted frequency
11123
0.088
-6572.1
0.650
0.660
11004
0.080
-6482.3
0.661
0.676
10336
0.097
-6309.4
0.592
0.598
10010
0.149
-5808.3
0.574
0.578
Labour share
High EPL makes price increases more likely
Table 4. Correlation between the probit coefficients of country dummies and EPL, all countries
Increase price
Reduce costs
Cost shock
Wage shock
0.461*
(0.259)
0.056
(0.255)
0.269
(0.363)
-0.208
(0.274)
Interpretation of results
• less efficient labour market institutions increase
persistence of inflation.
• I agree, even more see if the effect of labour
market institutions of the persistence of the
output gap is taken into account.
Interpretation of results
• collective bargaining with intermediate
coordination less suited to face common shocks.
Shocks more likely to be accommodated by
wage increases.
• Also: collective agreements at higher than
firm level increase likelihood of price increase
because marginal costs are rigid (and firm
knows that others firms face the same
problem). Strategic complementarity.
On PMR
Product market regulation does not have a big
effect on inflation.
Micro evidence form WDN shows that competion
not significant for cost push shock. Is significant
for wage shock.
Conclusion
• Important work
• We know very little about the effect of labour
market institutions. Explanatory power usually
very low.
• Empirical work welcome. I would like to learn
more about the channels: structural work