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|
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.