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. 

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