Template-Type: ReDIF-Paper 1.0

Author-Name: Evgeny Postnikov
Author-Email: postnikovea@yandex.ru
Author-Workplace-Name: Bank of Russia, Russian Federation

Author-Name: Dmitry Orlov
Author-Email: dmitryorlo888@gmail.ru
Author-Workplace-Name: Bank of Russia, Russian Federation


Title: Labour market and inflation relationship indicator 

Abstract: The labour market is closely connected to inflation processes, and is therefore a key factor to consider in monetary policy decisions. Russian regions differ substantially in terms of employment, wages, migration flows and the age structure of their population. Therefore, the effects of regional changes in the labour market on prices may be different. Since the Central bank’s inflation targeting policy is pursued nationwide, it is important for a regulator to factor in regional heterogeneity when assessing the impact of changes in the labour market on inflation growth.
This paper brings forward a composite indicator of the contribution of labour market changes to inflation increase – the Labour Market Indicator (LMI). To capture regional heterogeneity in terms of market labour indicators, regions are grouped into four clusters with different social, demographic and economic characteristics. We make the case that the impact of unemployment on inflation can be described as slight or moderate in Russia. The calculated quarterly LMI values are overall consistent with the actual effect of the labour market on inflation processes over the entire time horizon under study, which suggests that the estimates are reliable. The important benefit of the LMI is that it is possible to interpret and allows to assess the future impact of labour market on inflation one quarter ahead of available statistical data – which helps make better informed monetary policy decisions.

Length: 41 pages
Creation-Date: 2022-09
Revision-Date:
Publication-Status:
File-URL: http://www.cbr.ru/StaticHtml/File/140044/wp_96.pdf
File-Format: Application/pdf
File-Function:
Number:wps96
Classification-JEL: C32, C38, E24, E31.
Keywords: impact of the labour market on inflation, regional heterogeneity, clustering, principal component analysis, unemployment, wages, regression analysis.
Handle:RePEc:bkr:wpaper:wps96