Labour market developments from the perspective of the NAIRU and the cyclicality of the unemployment rate and wages

One of the concepts used to analyse inflation pressures stemming from the labour market is comparison of the unemployment rate and the NAIRU.¹  The NAIRU is an unobserved variable, so this box deals with its estimation using the Kalman filter. The current estimate suggests that the NAIRU declined during 2013 and 2014, so the current unemployment rate is still below the NAIRU despite having gone down significantly (see Chart 1). This estimate reflects the fact that the renewed economic growth has so far not been accompanied by significant inflation pressures, the output gap is still negative and nominal wage growth in the business sector remains subdued. The falling NAIRU meanwhile indicates greater flexibility of the domestic labour market, probably due among other things to growth in part-time employment and increased use of agency workers. However, the labour market recovery has caused the general unemployment rate and the NAIRU to converge significantly. This suggests that wage growth is likely to accelerate in the future.

Chart 1 (BOX) General unemployment rate and NAIRU
The gap between the NAIRU and the general unemployment rate has been narrowing in recent years 
(annual percentage changes; source: CZSO; CNB calculation)
 

The cycli /en/monetary-policy/.galleries/inflation_reports/2015/2015_II/boxes_and_annexes/zoi_2015_II_box_2_graf_1_en.gifcality of the real wage gap² and the unemployment ratedisplayed marked correlation in the past. However, the fall in economic activity during the economic crisis led to stronger adjustment of the labour market via falling employment (and hence also growth in the unemployment rate) than via real wages. Amid a marked slowdown in nominal wage growth, the real wage rigidity was also due to a sizeable temporary decline in net inflation in 2009. The subsequent renewed growth in employment and the related gradual closure of the unemployment gap was accompanied by only moderate growth in the average nominal wage amid renewed positive net inflation. This led to the real wage gap turning negative in 2012. The real wage gap did not start to narrow until the second half of 2014 (see Chart 2).

Chart 2 (BOX) Real wages and employment
The reaction of real wages to the economic crisis was much more abrupt than that of the unemployment rate
(deviation from potential in per cent; source: CZSO; CNB calculation; real wages adjusted by net inflation)
 

The renewed growth in average real wages during 2014 amid relatively low nominal wage growth raises the question of to what extent wage growth was affected by cyclical factors associated with the fast growing employment seen in past quarters. Granular data from the Average Earnings Information System (AEIS) for companies with 250 employees or more indicate that wage growth was reduced quite significantly last year by the recruitment of new employees (see Chart 3). New recruits start work at lower wage levels than current employees (up to 30% lower) and thus reduce the reported average wage.³ For compositional reasons, therefore, the marked labour market recovery is tending to reduce average wage growth at the moment, whereas in the medium run it should cause it to accelerate due to a shortage of labour.

Chart 3 (BOX) Contributions to wage growth according to AEIS
Average wage growth in companies with 250 employees or more was noticeably depressed in 2014 by lower wages among new employees
(annual percentage changes; contributions in percentage points; source: AEIS, CZSO; CNB calculation)

¹ The NAIRU (non-accelerating inflation rate of unemployment) is the unemployment rate at which the labour market begins to generate inflationary pressures stemming from a shortage of suitable labour. This leads to upward pressure on wages and, in turn, to accelerating inflation.

² Net inflation is used to calculate real wages from nominal wages in the business sector adjusted for estimated tax optimisation effects.

³ Leaving employees also have significantly lower wages than current employees (around 10% lower). However, their average wage growth usually exceeds that for current employees. The number of leaving employees more than doubled compared to the previous period. This caused their contribution to average wage growth in 2014 H1 to turn negative.