Unit labor costs and inflation in the OECD countries

Abstract

This paper investigates the drivers of inflation in 34 Organization for Economic Cooperation and Development countries from the first quarter of 2020 to the fourth quarter of 2022. Using an amplified price equation and two different panel data econometric techniques, we assess the impact of seven key variables on the price level. In this context, unit labor costs are a major source of price instability, whereas massive cash transfers generate demand-pull inflation. Moreover, higher financial costs are potentially inflationary, debt/contract relief policies are deflationary, and pandemic-related variables deliver mixed effects on prices. These findings have clear-cut policy implications.

Keywords

• inflation
• COVID-19 pandemic
• OECD countries
• panel data models