The large wage ripples were good—not bad—for the U.S. economy: Simulated inflation and real wage paths for flat and partially adjusted nominal wage growth

Flat wage growth Partially-adjusting wage growth
2019Q4 100 100
2020Q1 100.3656368 100.3656368
2020Q2 100.7326105 100.7326105
2020Q3 101.100926 101.100926
2020Q4 100.6814221 100.8425658
2021Q1 100.2551024 100.5798636
2021Q2 99.82204242 100.3128809
2021Q3 99.38232077 100.0416804
2021Q4 98.93601907 99.76632658
2022Q1 98.73598405 99.6847698
2022Q2 98.78796888 99.80279288
2022Q3 99.09726979 100.1261375

Notes: Nominal wage growth in the “flat wage growth” scenario is set at 3.5% and does not change over the course of the inflationary shock. Under the “partially adjusted” path, wage growth increases 0.5% for every 1% acceleration in overall inflation in the simulation. For the first four periods, wage growth is 3.5%, nonlabor input cost growth is 3.5%, productivity growth is 1.5%, and inflation is 2%. Then we shock nonlabor input cost growth and have it rise to 11.5% for four periods and then fall by 2.5% each quarter thereafter until it normalizes. 

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