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 | 2.0% | 2.0% |
| 2020Q1 | 2.0% | 2.0% |
| 2020Q2 | 2.0% | 2.0% |
| 2020Q3 | 2.0% | 2.0% |
| 2020Q4 | 5.2% | 6.2% |
| 2021Q1 | 5.3% | 6.2% |
| 2021Q2 | 5.3% | 6.3% |
| 2021Q3 | 5.3% | 6.3% |
| 2021Q4 | 5.4% | 6.4% |
| 2022Q1 | 4.3% | 5.0% |
| 2022Q2 | 3.3% | 3.6% |
| 2022Q3 | 2.2% | 2.3% |
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.