Skip to:
  1. Main navigation
  2. Main content
  3. Footer
Press Release

Connections between wages, prices, and economic activity a “tangled web,” say Cleveland Fed researchers

The slow growth of wages during the economic recovery has rekindled interest in the connections between wages, prices, and economic activity. Using a variety of statistical techniques, Federal Reserve Bank of Cleveland researchers Edward S. Knotek II and Saeed Zaman show that wages and prices tend to move together, complicating efforts to disentangle cause and effect. While the researchers find that subdued wage growth is more symptomatic of the existence of slack in the labor market than subdued inflation, they find that it is difficult to use these relationships to predict future inflation.

Knotek and Zaman say that subdued wage growth has been variously seen as both a cause and a consequence of the slow pace of economic growth and persistently low inflation rates following the recession. The researchers note that in some forecast narratives, a pickup in wage growth is viewed as a necessary condition for a stronger recovery and rising inflation. In others, it is a natural consequence of a tightening labor market.

Using three different measures of wages and several statistical techniques to examine the relationship between wages, prices, and economic growth, the researchers find the connections among the three economic variables to be “more akin to a tangled web than a straight line.” Knotek and Zaman find scant evidence that wages lead prices. They do find that wages are sensitive to economic activity and the level of slack in the economy; that is, there is a more stable wage Phillips curve than a price Phillips curve. However, their forecasting results suggest that the ability of wages to help predict future inflation is limited.

The researchers conclude that wages appear to be useful in assessing the current state of labor markets, but they are not necessarily sufficient for thinking about where the economy and inflation are going.

Read On the Relationships between Wages, Prices, and Economic Activity; or find the pdf version here.

And if you missed it earlier this month, you can find Recent Owners’ Equivalent Rent Inflation Is Probably Not a Blip on Inflation Central.

Federal Reserve Bank of Cleveland

The Federal Reserve Bank of Cleveland is one of 12 regional Reserve Banks that along with the Board of Governors in Washington DC comprise the Federal Reserve System. Part of the US central bank, the Cleveland Fed participates in the formulation of our nation’s monetary policy, supervises banking organizations, provides payment and other services to financial institutions and to the US Treasury, and performs many activities that support Federal Reserve operations System-wide. In addition, the Bank supports the well-being of communities across the Fourth Federal Reserve District through a wide array of research, outreach, and educational activities.

The Cleveland Fed, with branches in Cincinnati and Pittsburgh, serves an area that comprises Ohio, western Pennsylvania, eastern Kentucky, and the northern panhandle of West Virginia.

Media contact

Doug Campbell,, 513.455.4479