Determinants of Inflation in the Euro Area: The Role of Labour and Product Market Institutions by Florence Jaumotte and Hanan Morsy Discussion by Marco Hoeberichts

Paper relates inflation in the Euro area to institutional features in labour market and in product market. Focus is on labour market institutions

Good reasons for looking at labour market IPN has concluded that Inflation persistence is more prevalent in service sector, where wages determine (marginal) costs Inflation inherits most of its persistence from persistence in real marginal costs.

Indicators: Union density EPL Level of wage bargaining coordination Information on indexation is missing

Data from WDN

What is the mechanism? In your specification, structural indicators affect inflation through impact on (i) inflation persistence (ii) the response of inflation to the output gap (iii) the response of inflation to common shocks

What is the mechanism? Why not through the output gap itself? Maybe this is because output gap is cyclical indicator, not structural. But persistence of the output gap is structural. More generally, dynamics of the output gap are driven by labour market rigidities.

Adjustment of prices in response to cost shocks

High EPL makes price increases more likely

Interpretation of results less efficient labour market institutions increase persistence of inflation. I agree, even more see if the effect of labour market institutions of the persistence of the output gap is taken into account.

Interpretation of results collective bargaining with intermediate coordination less suited to face common shocks. Shocks more likely to be accommodated by wage increases. Also: collective agreements at higher than firm level increase likelihood of price increase because marginal costs are rigid (and firm knows that others firms face the same problem). Strategic complementarity.

On PMR Product market regulation does not have a big effect on inflation. Micro evidence form WDN shows that competion not significant for cost push shock. Is significant for wage shock.

Conclusion Important work We know very little about the effect of labour market institutions. Explanatory power usually very low. Empirical work welcome. I would like to learn more about the channels: structural work