Wage and Inflation Dynamics in Denmark

WageandInflationDynamicsinDenmark RajuHuidromSIP/2023/052 IMFSelectedIssuesPapersarepreparedbyIMFstaffasbackgrounddocumentationforperiodicconsultationswithmembercountries.ItisbasedontheinformationavailableatthetimeitwascompletedonJune1,2023.ThispaperisalsopublishedseparatelyasIMFCountryReportNo23/228. 2023 JUL ©2023InternationalMonetaryFundSIP/2023/052 IMFSelectedIssuesPaper EuropeanDepartment WageandInflationDynamicsinDenmarkPreparedbyRajuHuidrom AuthorizedfordistributionbyKotaroIshiJuly2023 IMFSelectedIssuesPapersarepreparedbyIMFstaffasbackgrounddocumentationforperiodicconsultationswithmembercountries.ItisbasedontheinformationavailableatthetimeitwascompletedonJune1,2023.ThispaperisalsopublishedseparatelyasIMFCountryReportNo23/228. ABSTRACT:NominalwagegrowthinDenmarkhassofarbeenmodestandoutpacedbyhighinflation,puttingrealwagegrowthinnegativeterritory.Amidstill-tightlabormarkets,thishasraisedconcernsaboutwagepressuresgoingforwardandtheeventualimpactoninflation.TheanalysissuggeststhatwageformationinDenmarkhashistoricallybeenpartlybackward-looking,andeconomicslackalsohasplayedarole.Giventhese,highinflationrealizedthusfarandthetightnessinthelabormarketimpliesthatwagepressuresareexpectedtoremainelevatedinthenearterm.Someofthesewagepressures,inturn,areexpectedtobepassedontocoreinflation,sustaininghighinflation.Thus,determinedpoliciestofightinflationareimportant. RECOMMENDEDCITATION:Huidrom,Raju.WageandInflationDynamicsinDenmark.IMFselectedIssuesPaper(SIP/2023/052).Washington,D.C.:InternationalMonetaryFund. JELClassificationNumbers: E24,E31 Keywords: Wages,inflation,passthrough Author’sE-MailAddress: RHuidrom@imf.org SELECTEDISSUESPAPERS WageandInflationDynamicsinDenmark June1,2023 DENMARK SELECTEDISSUES PreparedbyRajuHuidromsupportfromFudaJiang(allEUR). ApprovedBy EuropeanDepartment CONTENTS WAGEANDINFLATIONDYNAMICSINDENMARK2 A.Introduction2 B.InflationDynamics:ADeeperDive3 C.EmpiricalApproach5 D.ConclusionsandPolicies9References13 ANNEX I.TechnicalDetails11 2015Q2 2015Q4 2016Q2 2016Q4 2017Q2 2017Q4 2018Q2 2018Q4 2019Q2 2019Q4 2020Q2 2020Q4 2021Q2 2021Q4 2022Q2 2022Q4 2015Q1 2015Q3 2016Q1 2016Q3 2017Q1 2017Q3 2018Q1 2018Q3 2019Q1 2019Q3 2020Q1 2020Q3 2021Q1 2021Q3 2022Q1 2022Q3 2023Q1 2015Q2 2015Q4 2016Q2 2016Q4 2017Q2 2017Q4 2018Q2 2018Q4 2019Q2 2019Q4 2020Q2 2020Q4 2021Q2 2021Q4 2022Q2 2022Q4 2015Q2 2015Q4 2016Q2 2016Q4 2017Q2 2017Q4 2018Q2 2018Q4 2019Q2 2019Q4 2020Q2 2020Q4 2021Q2 2021Q4 2022Q2 2022Q4 WAGEANDINFLATIONDYNAMICSINDENMARK1 NominalwagegrowthinDenmarkhassofarbeenmodestandoutpacedbyhighinflation,puttingrealwagegrowthinnegativeterritory.Amidstill-tightlabormarkets,thishasraisedconcernsaboutwagepressuresgoingforwardandtheeventualimpactoninflation.TheanalysissuggeststhatwageformationinDenmarkhashistoricallybeenpartlybackward-looking,andeconomicslackalsohasplayedarole.Giventhese,highinflationrealizedthusfarandthetightnessinthelabormarketimpliesthatwagepressuresareexpectedtoremainelevatedinthenearterm.Someofthesewagepressures,inturn,areexpectedtobepassedontocoreinflation,sustaininghighinflation.Thus,determinedpoliciestofightinflationareimportant. A.Introduction 1.NominalwageincreasesinDenmarkhavebeenmodestdespiteelevatedinflationandstill-tightlabormarkets.AsinmanycountriesinEurope,headlineinflationinDenmarksurgedduring2022mainlyduetohighenergyprices.Givenmoderatingenergyprices,headlineinflationhaseasedfromapeakof11½percent(year-over-year)inOctober2022;nonetheless,itremainselevated.Labormarketsremainrelativelytightwiththeunemploymentrateinthelowestrangesincethelate2000s.Atthesametime,nominalwagegrowthhasremainedmodest,around HeadlineHICPInflation (Percentchange,y/y) 12 10 8 6 4 2 0 -2 Denmark Euroarea UnemploymentRate (Percent,SA)12 11 10 9 8 7 6 5 4 3 2 DenmarkEuroarea Sources:Eurostat;HaverAnalytics;andIMFstaffcalculations. NominalWageGrowth (Percentchange,y/y) 12 10 8 6 4 2 0 -2 -4 -6 Denmark Euroarea Sources:Eurostat;HaverAnalytics;andIMFstaffcalculations. RealWageGrowth (Percentchange,y/y)12 10 8 6 4 2 0 -2 -4 -6 -8 Denmark Euroarea Sources:Eurostat;HaverAnalytics;andIMFstaffcalculations. Sources:Eurostat;HaverAnalytics;andIMFstaffcalculations. 3½percent(year-over-year)in2022:Q4—wellbelowheadlineinflation,thusplacingrealwagegrowthintonegativeterritory. 1PreparedbyRajuHuidromwithsupportfromFudaJiang(allEUR). 2.Thishasraisedconcernsaboutwagepressuresgoingforward,andtheeventualimpactoninflation.Wagepressureswilllikelyarisefromworkers’demandstocompensatefortheerosionofrealincomessustainedthusfar.Indeed,recentcollectiveagreementscalledforwagegrowthofabout5percentannuallyoverthenexttwoyears,higherthaninthepast.Thesewagepressurescouldfeedintoinflation,which—alongwiththestill-tightlabormarket—couldmaketheelevatedinflationtopersist.Inanextremecase,higherwagesandinflationcouldbeself-reinforcing,resultinginawage-pricespiral.Thus,understandingthedriversofwageandinflationisimperativesincethisunderpinstheappropriatepolicyresponse. 3.ThischapteranalyzeswageandinflationdynamicsinDenmark.Themainquestionsexplor