NON-LINEARITY BETWEEN PRICE INFLATION AND LABOR COSTS: THE CASE OF CENTRAL EUROPEAN COUNTRIES
NON-LINEARITY BETWEEN PRICE INFLATION AND LABOR COSTS: THE CASE OF CENTRAL EUROPEAN COUNTRIES
| Author: | Alena Pavlova M.A., |
|---|---|
| Type: | IES Working Papers |
| Year: | 2022 |
| Number: | 25 |
| ISSN / ISBN: | |
| Published in: | IES Working Papers 25/2022 |
| Publishing place: | Prague |
| Keywords: | inflation, labor cost, non-linear model, V4 countries |
| JEL codes: | E24; E31; E37 |
| Suggested Citation: | Pavlova A. (2022): " Non-Linearity between Price Inflation and Labor Costs: The Case of Central European Countries " IES Working Papers 25/2022. IES FSV. Charles University. |
| Abstract: | This article explores the relationship between labor costs and price inflation under two conditions. Firstly, with linear assumption and classical techniques. Secondly, without assuming linearity, by a novel non-parametric machine learning method, namely gradient boosting. With quarterly data from 1996 to 2022 for V4 countries, we find linear and non-linear dependency between labor cost and price inflation. However, the magnitude of the connection is country-specific and changes over time. Our findings indicate that a significant linear relationship between considered variables does not lead to the higher predictability power of labor cost in a non-parametric model, which predicts inflation. Even opposed, the Czech Republic, the country with the highest correlation between unit labor cost(ULC) and deflator, shows better prediction in a case when the ULC is not in the set of independent variables. This fact highlights the importance of non-linearity for the inflation model. |
| Downloadable: | wp_2022_25_pavlova.pdf |
