You are here

Economics in a picture

Economics in a picture

In Portugal, for the most recent period, there has been a negative relationship between the nominal wage growth rate and the unemployment rate

10.01.2020

In Portugal, over the period 2004-2017, there was evidence of a clear inverse relationship between the nominal wage growth rate (wage inflation) and the unemployment rate, faithfully reflecting the stylised version of the Phillips curve. This relationship, which is interpretable as an aggregate supply function, implies that nominal wages grow more in periods of low unemployment than in periods of high unemployment, where nominal wage growth is weak. An increase of one percentage point in the unemployment rate corresponded to a significant decrease in wage inflation of 0.4 percentage points.

 

In a context in which expectations about the inflation rate are firmly anchored at a low level, and where there is a clear downward rigidity of nominal wages, the evolution of the nominal wage growth rate is essentially determined by the incidence of wage freezes. Indeed, during the most severe period of the economic crisis, wage freezes spread to four-fifths of Portuguese workers in the private sector.

 

For more details see Fernando Martins and Pedro Portugal (2019) “How did the downward wage rigidity shape unemployment during the crisis?” in Portuguese economic growth: A view on structural features, blockages and reforms, Banco de Portugal.

 

Prepared by Fernando Martins and Pedro Portugal. The analyses, opinions, and findings expressed above are those of the authors and do not necessarily coincide with those of Banco de Portugal or the Eurosystem.

 

If you want to receive an e-mail whenever a new “Economics in a picture” is published send your request to info@bportugal.pt.