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Labor Productivity and Inflation Dynamics: the Euro Area versus the US
1 : University of Jena
2 : Deutsche Bundesbank
3 : Bank of Italy
Labor productivity is more procyclical and inflation is less volatile in the Euro Area com-
pared to the US. To explain these differences, we estimate a business cycle model with
search frictions, employment, hours worked and two alternative wage bargaining setups.
In addition, we include variable labor effort. Two results emerge. First, wages are more
rigid and effort is more important in the Euro Area, generating procyclical productivity.
Second, variable effort does not affect inflation fluctuations under efficient wage bargain-
ing. However, under right-to-manage bargaining, procyclical labor productivity combined
with higher wage rigidity in the Euro Area reduces inflation volatility via the wage channel.
