Wage Setting in Times of High and Low Inflation

The recent surge in inflation led many unions and firms to alter their bargaining and wage-setting policies. Using novel German firm-level survey data, we document the extent of state dependency of wage-setting behavior across firms and workers given high vs. low inflation environments. The granularity of our micro-level data also allows us to study heterogeneous patterns across sectors, firms, and workers. Embedding the empirical findings in a New Keynesian model with heterogeneous firms, we then analyze the implications of state-dependent wage-setting behavior for the transmission and propagation of shocks. Lastly, we discuss the interaction of state-dependent wage setting with firms' monopsony power and how these features impact monetary policy and the slope of the Phillips curve.

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