Cue as Ahumada, Víc o Manuel; Pe o ini He nández, Ignacio
A icle
Uni labo cos s and in la ion in he OECD coun ies
PSL Qua e ly Re iew
P o ided in Coope a ion wi h:
Associazione Economia ci ile, Rome
Sugges ed Ci a ion: Cue as Ahumada, Víc o Manuel; Pe o ini He nández, Ignacio (2024) : Uni labo
cos s and in la ion in he OECD coun ies, PSL Qua e ly Re iew, ISSN 2037-3643, Associazione
Economia ci ile, Rome, Vol. 77, Iss. 308, pp. 3-22,
h ps://doi.o g/10.13133/2037-3643/18228
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ol. 77 n. 308 (Ma ch 2024)
Uni labo cos s and in la ion in OECD coun ies du ing
he COVID-19 pandemic
VÍCTOR MANUEL CUEVAS AHUMADA, IGNACIO PERROTINI HERNÁNDEZ
Abs ac :
This pape in es iga es he d i e s o in la ion in 34
O ganiza ion o Economic Coope a ion and
De elopmen coun ies du ing he COVID-19 pandemic.
Using an ampli ied p ice equa ion and wo di e en
panel da a econome ic echniques, we assess he impac
o se en key a iables on he p ice le el. In his con ex ,
uni labo cos s a e a majo sou ce o p ice ins abili y,
whe eas massi e cash ans e s gene a e demand-pull
in la ion. Mo eo e , highe inancial cos s a e po en ially
in la iona y, deb /con ac elie policies a e
de la iona y, and pandemic- ela ed a iables deli e
mixed e ec s on p ices. These indings ha e clea -cu
policy implica ions.
Cue as: Uni e sidad Au ónoma Me opoli ana (Mexico), email:
[email protected]
Pe o ini: Uni e sidad Nacional Au ónoma de México, email:
[email p o ec ed]
How o ci e his a icle:
Cue as Ahumada V.M., Pe o ini He nández I. (2024), “Uni labo
cos s and in la ion in OECD coun ies du ing he COVID-19
pandemic”, PSL Qua e ly Re iew, 77 (308), pp. 3-22.
DOI: h ps://doi.o g/10.13133/2037-3643/18228
JEL codes:
C33, E12, E31
Keywo ds:
in la ion, COVID-19 pandemic, OECD coun ies, panel da a models
Jou nal homepage:
h p: //www.pslqua e ly e iew.in o
In la ion may emana e om a numbe o di e en sou ces
o he han excess demand in he p oduc ma ke . In
pa icula : p ices may ise because p ices a e based on cos s
o p oduc ion and cos s ise; p ices may ise because o shi s
in demand om one sec o o he economy o ano he and
p ices a e mo e lexible in he upwa d di ec ion han in he
downwa d di ec ion; and p ices may ise in a sel - ein o cing
way because o a loss o con idence in money and he
de elopmen o a wage-p ice spi al.
A.P. Thi lwall (1974, p. 37)
This pape in es iga es he main sou ces o in la ion in 34 (ou o he 38) na ions o he
O ganiza ion o Economic Coope a ion and De elopmen (OECD) du ing he COVID-19
pandemic.
1
To ha end, we employ a p ice equa ion wi h se en explana o y a iables: uni labo
cos s (ULC), policy- ela ed in e es a es, eal e ec i e exchange a es, wo economic suppo
1
Fou na ions we e excluded due o he una ailabili y o da a. The 34 coun ies included a e: Aus alia, Aus ia,
Belgium, Canada, Chile, Czech Republic, Denma k, Es onia, Finland, F ance, Ge many, G eece, Hunga y, I eland, Is ael,
I aly, Japan, La ia, Li huania, Luxembou g, Mexico, Ne he lands, New Zealand, No way, Poland, Po ugal, Slo enia,
Sou h Ko ea, Spain, Sweden, Swi ze land, Republic o Tü kiye, Uni ed Kingdom, and Uni ed S a es.
A icles
4 Uni labo cos s and in la ion in OECD coun ies du ing he COVID-19 pandemic
PSL Qua e ly Re iew
a iables, and wo pandemic- ela ed a iables. The economic suppo a iables a e income
suppo and deb /con ac elie , whe eas he pandemic- ela ed a iables a e he s ingency
index, cap u ing closu e and con ainmen measu es, and he numbe o new COVID-19 cases
smoo hed pe million.
Al hough he OECD economies a e he e ogeneous, he global na u e o he pandemic and he
ela i e coo dina ion o na ional economic policies jus i y he sea ch o empi ical egula i ies
ac oss na ions. Mo eo e , OECD coun ies ypically p o ide high-quali y da a, esul ing in ewe
measu emen e o s. To ob ain mo e eliable e idence and enhance he analy ical oolki o he
pape , we use wo panel da a econome ic p ocedu es: Two-s age leas squa es (2SLS), and
di e ence gene alized me hod o momen s (GMM), also known as he A ellano-Bond es ima o
(A ellano and Bond, 1991). These me hodologies complemen each o he because 2SLS is
app op ia e o es ima ing a ixed e ec s panel da a model, which cap u es he he e ogenei y
ac oss coun ies in a s a ic se ing. In con as , he A ellano-Bond es ima o is sui able o
es ima ing a dynamic panel da a model whe e coun y he e ogenei y is elimina ed by means o
i s di e encing he da a. Wha is mo e, bo h p ocedu es a e obus o endogenei y p oblems,
meaning ha hey a e consis en unde ce ain condi ions. We ensu e ha hese condi ions a e
sa is ied and implemen e iciency-enhancing measu es.
The panel da a models in ol e 34 na ions and qua e ly da a om he i s qua e o 2020 o
he ou h qua e o 2022, comp ising 12 ime-se ies obse a ions.
2
Un o una ely, as o Janua y
1, 2023, he Ox o d COVID-19 Go e nmen Response T acke (OxCGRT) s opped p o iding da a
o he income suppo and he deb /con ac elie indices, so ou sample pe iod canno go
beyond 2022 wi h he cu en model speci ica ion. The empi ical e idence is consis en ac oss
econome ic me hods and emedial measu es in showing ha :
1) ULC a e a majo sou ce o in la ion. As we shall see, ULC g ew mo e han 17% du ing he
pe iod 2020-2022, mainly because o he pandemic and he g ea lockdown. In his
con ex , ULC ha e a s ong posi i e impac on p ices, which is s a is ically signi ican a
he 1% le el in e e y eg ession.
2) Income suppo policies gene a e demand-pull in la ion, whe eas deb /con ac elie
measu es a e de la iona y by alle ia ing inancial dis ess. Las ly, he ne e ec o closu e
and con ainmen measu es (i.e., school and wo kplace closings, es ic ions o na ional
and in e na ional a eling, and p ohibi ion o public e en s) is de la iona y. We use he
e m “ne e ec ” because hese measu es gene a e de la iona y e ec s h ough educed
consump ion on he demand side, and in la iona y e ec s h ough he dis up ion o
p oduc ion chains on he supply side.
Secondly, unde he A ellano-Bond (AB) es ima o , ega dless o whe he we use qua e ly o
semi-annual da a, we also ind ha :
1) In e es a es bea a posi i e ela ionship wi h he p ice le el. Acco ding o Céspedes e al.
(2020) and Che kasky (2022), in he p esence o inancial dis ess, highe inancial cos s
can induce i ms o aise p ices. This inding is also consis en wi h he Gibson pa adox,
which is explained in he nex sec ion.
2) The p opaga ion o he i us, like closu e and con ainmen measu es, b ings abou
demand- and supply-side e ec s. Howe e , he ne e ec o he new COVID-19 cases
2
To deal wi h he so-called ins umen p oli e a ion p oblem o he A ellano-Bond es ima o , we also es ima e he
model wi h semi-annual da a, compa e he indings, and pe o m Sa gan-Hansen es s o o e iden i ying es ic ions.
In addi ion, we conduc A ellano-Bond es s o i s - and second-o de au oco ela ion.
V.M. Cue as Ahumada, I. Pe o ini He nández 5
smoo hed pe million was in la iona y, p esumably because p oduc ion chains end o ail
as he numbe o sick wo ke s ises.
3) In la ion is an ine ial phenomenon o a ce ain deg ee, gi en he in luence o pas in la ion
on cu en in la ion.
The e o e, o he bes o ou knowledge, his pape ills a small gap in he empi ical li e a u e
by showing he signi ican impac o ULC on in la ion du ing he COVID-19 pandemic. Among
o he hings, ou pape p o ides empi ical suppo o Céspedes e al.’s (2020) heo e ical
asse ion ega ding he beha io o ULC du ing he pandemic and he consequences o i . Based
on a heo e ical model o a small open economy, hese au ho s show ha he COVID-19 pandemic
can con ibu e o educed labo p oduc i i y. The a ionale is ha wo ke s who lose hei jobs
du ing he pandemic a e o ced o mig a e o indus ies whe e hei expe ise is no as use ul as
be o e, so labo p oduc i i y alls and ULC end o ise.
Fu he mo e, he in la iona y episodes aking place a e he g ea lockdown a e mainly
a ibu ed, in he cu en li e a u e, o coun e cyclical policies unning in o capaci y cons ain s.
As we explain in de ail in he nex sec ion, E doğan e al. (2020) p o ide e idence ha pandemic-
ela ed in la iona y p essu es in 28 Eu opean Union coun ies and candida e na ions we e he
esul o mone a y g ow h, among o he ac o s. Examining 32 eme ging economies and 7
ad anced economies, de Soy es e al. (2022) conclude ha he su ge in in la ion was caused by a
combina ion o iscal expansion and an insu icien ou pu esponse. Using en na ions as a
benchma k ( i e om La in Ame ica and i e om Asia), Abdelka i e al. (2023) o e some
e idence ha income suppo measu es and go e nmen -backed loans we e key sou ces o
in la ion. Fo ou Asian economies, Riz i e al. (2023) con end ha mone a y expansion played a
pi o al ole in os e ing p ice ins abili y du ing he pandemic. Las ly, acco ding o Jo dà e al.
(2022), Gha ehgozli and Lee (2022), and Kliesen and Wheelock (2023), he ecen in la iona y
ou bu s in he US was he esul o a subs an ial inc ease in go e nmen spending. Agains his
backd op, ou pape highligh s he ole played by ULC while acknowledging he in luence o
income suppo p og ams, deb /con ac elie packages, and o he a iables.
The es o he pape is o ganized as ollows. Sec ion 1 b ie ly e iews he ecen econome ic
li e a u e. Sec ion 2 speci ies he heo e ical model, explains he econome ic me hods, and
desc ibes he da a. Sec ion 3 p esen s he empi ical e idence. Finally, we summa ize he indings
and make some policy ecommenda ions.
1. Li e a u e e iew
The wo ld economy has gone h ough an unp eceden ed episode. As opposed o p e ious
c ises o igina ed ei he in he inancial o he eal sec o , he ecen economic imbalances s em
om a wo ldwide heal h c isis (Susskind and Vines, 2020), leading o he g ea lockdown and hen
o expansiona y iscal and mone a y policies aimed a e i alizing economic ac i i y. Mo eo e ,
al hough closu e and con ainmen measu es sa ed li es and educed he numbe o
hospi aliza ions, hey had wo undesi able ou comes:
1) A con ac iona y demand-side e ec , causing a downwa d p essu e on p ices. The closing
o public places, he ull o pa ial in e up ion o ai and land anspo a ion se ices, he
s oppage o ec ea ion and en e ainmen ac i i ies, and he s ay-a -home manda es had
a de as a ing e ec on he se ice sec o (Yeh, 2021). The consump ion o du able goods
also ell du ing he i s qua e o 2020 and subsequen ly managed o eco e (Taube
6 Uni labo cos s and in la ion in OECD coun ies du ing he COVID-19 pandemic
PSL Qua e ly Re iew
and Van Zandweghe, 2021). In any e en , e ail and wholesale comme ce endu ed a
subs an ial nega i e impac in he ea ly s ages o he pandemic (Yeh, 2021).
2) A con ac iona y supply-side e ec , gi en he ini ial down all in economic ac i i y and he
massi e bank up cy o en e p ises (Makin and Lay on, 2021). In ac , wo ldwide
qua an ine measu es ga e ise o an “acu e o e all dis up ion” (De e eux e al., 2020, p.
S226), gi en ha lo s o businesses we e o ced ei he o empo a ily close o d as ically
limi hei ope a ions. Ba low e al. (2021) poin ou ha in e na ional ade lows as well
as global supply chains (GSC) we e in e up ed. This, in u n, caused he lack o nume ous
elec ical and elec onic componen s used in he manu ac u ing indus y and he se ice
sec o (Akbulae e al., 2020).
In his con ex , go e nmen s implemen ed s imulus packages o so en he e ec s o he heal h
and economic c isis on i ms and households. B oadly speaking, economic suppo p og ams
consis ed o :
1) Income suppo measu es (i.e., iscal expansion) o businesses and households. Businesses
wi h wo king capi al p oblems, especially in he ha des -hi indus ies, bene i ed om
go e nmen subsidies in exchange o employmen e en ion assu ances. In ac ,
go e nmen s we e seeking o p ese e p oduc ion capaci ies and help i ms e ain
wo ke s, especially hose di icul o eplace gi en hei quali ica ions (Akbulae e al.,
2020; Makin and Lay on, 2021). Di ec cash ans e s we e also made o unemployed
people and in o mal wo ke s.
2) Deb /con ac elie measu es, aimed a alle ia ing he inancial si ua ion o households
and small-business owne s. To ha end, many go e nmen s eso ed o o e ing loans
wi h below-ma ke in e es a es o he needy, g an ing g ace pe iods o indi iduals and
i ms owing axes and u ili y paymen s, and empo a ily eezing mo gages (Akbulae e
al., 2020; Makin and Lay on, 2021).
3) Cu s in in e es a es and ese e equi emen s (i.e., mone a y expansion). To s imula e
p i a e in es men and consume s’ demand o du able goods, many cen al banks
educed he policy- ela ed in e es a e (Mai al and Ba zani, 2020). A he same ime, o
imp o e liquidi y in he inancial ma ke s, some cen al banks b ough down legal ese e
equi emen s (Economic Commission o La in Ame ica and he Ca ibbean, 2020).
In summa y, he COVID-19 pandemic and he social dis ancing measu es gene a ed demand-
side con ac ions, which we e de la iona y, and supply-side con ac ions, which we e in la iona y.
Tha is why Ch is ensen e al. (2020) and Shapi o (2020) asse ha widesp ead lockdowns
lowe ed no only consume demand bu also agg ega e supply. Howe e , in hei iew, he
demand-side e ec was s onge han he supply-side e ec , so he ne impac o social dis ancing
on in la ion was nega i e. None heless, o keep economic ac i i y om alling u he ,
go e nmen s eso ed o coun e cyclical policies ha ul ima ely d o e in la ion up amid a
pe sis en unde pe o mance o GSC.
In his con ex , se e al s udies ega ding he d i e s o p ice ins abili y ha e been conduc ed.
E doğan e al. (2020) analyze he sou ces o in la ion in he 28 Eu opean Union coun ies and
candida e na ions du ing he pe iod Janua y-July 2020. Based on a panel da a model, hese
au ho s ind ha p ice inc eases a e due o mone a y expansion, exchange a e dep ecia ion, and
ex e nal shocks. They explain ha exchange a e dep ecia ion in some na ions was caused by
economic unce ain y, p omp ing p i a e agen s o buy o eign cu encies o p o ec hei sa ings.
The esul ing capi al ou lows led o cu ency dep ecia ion which, in u n, made impo ed
V.M. Cue as Ahumada, I. Pe o ini He nández 7
in e media e inpu s mo e expensi e. The mos impo an con ibu ion he e is o show he
in luence o ex e nal shocks on he domes ic economy, unde sco ing he ele ance o
in e na ional coope a ion. Howe e , li le conside a ion is paid o he ole o iscal policy and
pandemic- ela ed a iables in gene a ing p ice ins abili y.
By con as , de Soy es e al. (2022) ocus on he link be ween easy iscal policies and in la ion
using c oss-coun y eg essions in ol ing 39 economies: 32 eme ging ma ke economies and
se en ad anced economies. They emphasize ha : 1) G owing iscal spending aised consume
demand o goods du ing 2021; and 2) iscal suppo packages in some coun ies could ha e
enhanced excess demand in o he s h ough in e na ional ade. None heless, i ms con inued o
ace p oduc ion es ain s du ing ha ime, e en as qua an ine measu es we e being elaxed and
people’s mobili y ebounded. The e o e, hey conclude ha in la iona y p essu es buil up
because o he insu icien ou pu esponse o iscal loosening, albei his policy p e en ed many
economies om sinking in o a pe sis en ecession. Cap u ing he exposu e o coun ies o
domes ic and o eign iscal expansion is an impo an con ibu ion he e. None heless, while
acknowledging ha models mus be pa simonious, his s udy does no accoun o o he ele an
sou ces o in la ion.
Ano he mul i-coun y s udy o in la ion is Abdelka i e al. (2023). To analyze he impac o
he COVID-19 pandemic and ou policy a iables on he p ice le el, hey u ilize panel da a
in ol ing en na ions ( i e La in Ame ican and i e Asian) and mon hly obse a ions om Janua y
o Sep embe o 2020. The empi ical e idence s ems om he use o ou model speci ica ions and
he AB me hodology. B oadly speaking, hei conclusion is ha p ice ins abili y was caused by
income suppo measu es, deb /con ac elie ini ia i es, and he numbe o COVID-19 cases
in e ac ing wi h social dis ancing measu es. The a ionale o using ou model speci ica ions is o
conduc a sepa a e examina ion o he e ec s o ou subse s o a iables. While his app oach
may educe mul icollinea i y p oblems, i ca ies he isk o excluding ele an a iables in some
o all he ou models.
Riz i e al. (2023) employ a ixed e ec s panel da a model consis ing o mon hly da a om
Janua y 2020 o Decembe 2021 om ou ASEAN economies (i.e., Indonesia, Malaysia, Singapo e,
and Thailand) o assess he in la iona y impac o he b oad mone a y agg ega e M3, he policy-
ela ed in e es a e, he exchange a e, and he s ingency index. These au ho s p o ide e idence
ha M3 is posi i ely ela ed o he consume p ice index, whe eas he in e es a e is nega i ely
ela ed. The implica ion is ha highe in e es a es can be e ec i e in alle ia ing he p ice
ins abili y caused by he coun e cyclical mone a y policies implemen ed du ing he COVID-19
c isis.
Jo dà e al. (2022) add ess he in la iona y di e en ials be ween he US and o he ad anced
economies ha ecen ly eme ged. Al hough supply-side dis up ions, coupled wi h coun e cyclical
economic policies, caused an in la iona y ou bu s ac oss he wo ld, in 2021 US in la ion
no iceably su passed in la ion in o he ad anced na ions. Acco ding o hese au ho s, his can be
explained by he magni ude o he US iscal s imulus aimed a o se ing he pandemic- ela ed
ecessiona y e ec s. Such a conclusion is based on a coun e ac ual analysis o he US economy,
which compa es an ex-pos o ecas o in la ion assuming no iscal s imulus wi h i s ac ual
e olu ion. None heless, o he in es iga ions also conclude ha he ecen in la ion in he US was
he esul o a subs an ial inc ease in go e nmen spending (Gha ehgozli and Lee, 2022; Kliesen
and Wheelock, 2023).
Vic o e al. (2021) ely on gene alized addi i e models (GAMs) o s udy he in la ion-
unemploymen ade-o in he Uni ed Kingdom and India du ing he pe iod Janua y 2016-
Decembe 2020. They explain ha he GAM echnique allows o a non-no mal dis ibu ion o he
8 Uni labo cos s and in la ion in OECD coun ies du ing he COVID-19 pandemic
PSL Qua e ly Re iew
eg ession esiduals by emo ing ou lie s, he eby mi iga ing he mac oeconomic ola ili y
gene a ed by he COVID-19 pandemic. Thei e idence o he Uni ed Kingdom is consis en wi h
con en ional economic heo y, as i poin s o a nega i e ela ionship be ween in la ion and
unemploymen in he sho - e m ho izon. In he case o India, howe e , hese au ho s make a
coun e in ui i e inding, gi en ha in la ion and unemploymen a e posi i ely ela ed. While he
ou lie emo al echnique employed he e is help ul o mi iga e esidual depa u es om
no mali y, he highe ola ili y in India is likely o cause a mo e signi ican in o ma ion loss in ha
coun y han in he Uni ed Kingdom. The e o e, he empi ical e idence o India migh no be as
obus as ha o he Uni ed Kingdom.
Che kasky (2022) analyzes he in luence o in e na ional in la ion on La in Ame ican in la ion
du ing 2021 and 2022. To ha end, howe e , he au ho wo ks wi h a his o ical app oach, since
he es ima es wo panel da a models wi h annual da a om 2000 o 2019. His main model in ol es
13 La in Ame ican na ions and annual obse a ions o he pe iod. Using he AB es ima o ,
Che kasky concludes ha he dominan in la iona y ac o s a e nominal wages, nominal exchange
a es, and in e na ional ood p ices. Al hough Che kasky’s empi ical wo k is based on a plausible
cos app oach, wo po en ial conce ns a ise. One is he use o wages as a p oxy o ULC, igno ing
labo p oduc i i y (pe haps because o lack o da a). The o he is ha he eliabili y o he AB
es ima o es s on ha ing mo e c oss-sec ion uni s (i.e., coun ies) han ime pe iods, which does
no happen in his case.
To s udy he impac o in e es a es and in la ion on indus ial p oduc ion in Pakis an, Haya
e al. (2021) eso o coin eg a ion and G ange -causali y es s, coupled wi h he wa ele
ans o ma ion app oach. Along hese lines, hey u ilize mon hly da a om Janua y 1991 h ough
May 2020, so ha hei sample pe iod includes he beginning o he COVID-19 pandemic.
Combining he wa ele ans o ma ion app oach wi h G ange causali y es s (which measu e
p edic i e powe ), hese au ho s indica e ha he e is a eedback sys em be ween in e es a es
and in la ion in he sho un (i.e., 2 o 4 mon hs) as well as in he long un (i.e., mo e han 32
mon hs). The policy implica ion is ha he nega i e impac o he COVID-19 pandemic on he
Pakis ani economy could be so ened by keeping in e es a es (and in la ion) low in he sho -
and long- e m ho izons. A salien aspec o his pape is i s connec ion wi h he Gibson pa adox
o p ice puzzle, which unde sco es he long- un posi i e ela ionship be ween in e es a es and
in la ion (Gibson, 1923; Keynes, 1930; Shille and Siegel, 1977).
3
Va ious heo ies a emp o
cla i y why p ices and in e es a es can all and ise oge he o e ex ended pe iods (Sa gen ,
1973, p. 385). Howe e , a compelling explana ion wi hin his li e a u e posi s ha he in e es
a e is a componen o uni p oduc ion cos s (Ba h and Ramey, 2001; Céspedes e al., 2020;
Che kasky, 2022; Cucciniello e al., 2022). Acco ding o Ba h and Ramey (2001), es ic i e
mone a y policy may exe a obus supply-side e ec by ele a ing he cos o wo king capi al
inancing. In a simila ein, Céspedes e al. (2020) and Che kasky (2022) indica e ha aising
in e es a es can be de imen al in he p esence o inancial dis ess. Las ly, Cucciniello e al.
(2022) conduc mul iple obus ness es s o show ha he posi i e link be ween in e es a es and
p ices is a common phenomenon a he han a pa adox.
Ape gis and Ape gis (2021) in es iga e he impac o he COVID-19 pandemic on in la ion
expec a ions and in la ion unce ain y in he US economy. Using a gene alized au o eg essi e
condi ional he e oscedas ici y model wi h exogenous a iables (GARCHX) and daily da a
spanning om Janua y 2, 2019, o July 31, 2020, hey show ha he COVID-19 pandemic aised
3
While Keynes (1930) a ibu ed he posi i e co ela ion be ween in e es a es and in la ion o Al ed He be Gibson,
his appa en pa adox was i s documen ed by Thomas Tooke (1838).
V.M. Cue as Ahumada, I. Pe o ini He nández 9
in la ion unce ain y as well as in la ion expec a ions. Such a inding is ele an because expec ed
in la ion and i s ola ili y in luence p i a e consump ion and in es men and, he e o e, ex-pos
in la ion and economic ac i i y. In his con ex , Ape gis and Ape gis unde sco e he pandemic-
ela ed isk o in la iona y expec a ions going a beyond he cen al banks’ a ge s. Howe e ,
hei s udy is es ic ed o he case o he US economy.
In summa y, he p e ailing iew is ha in la ion is mos ly d i en by demand-side a iables in
a numbe o coun ies. Th ough iscal and mone a y loosening, many coun ies we e able o make
cash ans e s o households and en e p ises, he eby lessening unemploymen and inancial
ha dship. Public spending escala ion was inanced h ough a combina ion o deb and money
supply g ow h, gi en ha cen al banks conduc ed massi e pu chases o go e nmen bonds and
o he inancial asse s, implemen ed in e es a e cu s, and g an ed loans wi h subsidized in e es
a es (Cla ida e al., 2021; Agu , 2022). Reg e ably, wo ldwide social dis ancing measu es and
he sp ead o he i us i sel ga e ise o a a ie y o supply-side dis up ions (Ba low e al., 2021;
Akbulae e al., 2020; San ac eu and LaBelle, 2022), so agg ega e supply was ou paced by he
ising demand. In his con ex , ou in es iga ion is one o he ea lies e o s o assess he supply-
side sou ces o in la ion du ing he COVID-19 pandemic in a panel da a se ing. To he bes o ou
knowledge, one no el y o he p esen wo k is o show ha ULC a e a majo d i e o p ice
ins abili y o e his pe iod. Wha is mo e, his e idence holds a he highes signi icance le el
ac oss wo econome ic p ocedu es and hei co esponding emedial measu es, he eby leading
o clea -cu policy ecommenda ions. On he o he hand, ou esea ch o e s some empi ical
suppo o he idea, which la gely emains in he heo e ical domain hus a , ha highe in e es
a es can be in la iona y wi h widesp ead inancial dis ess ac oss indus ies (Céspedes e al.,
2020; Che kasky, 2022). Las ly, we p o ide e idence ha cos -push in la ion coexis s wi h
demand-pull and ine ial in la ion.
2. Model, es ima ion me hods, and da a desc ip ion
2.1 Model and es ima ion p ocedu es
The s a ing poin o conduc he empi ical analysis is he ollowing p ice equa ion, based on
he model de eloped by Go don and S ock (1998, p. 302):
𝑝𝑡= 𝛼0+ 𝛼1𝑢𝑙𝑐𝑡+ 𝛼2𝑑𝑡+ 𝛼3𝑠𝑡 (1)
whe e 𝑝𝑡 is he p ice le el, 𝑢𝑙𝑐𝑡 a e uni labo cos s, and 𝑑𝑡 and 𝑠𝑡 a e ec o s o a iables. While
𝑑𝑡 includes demand a iables, 𝑠𝑡 inco po a es cos a iables o he han uni labo cos s (ULC).
4
The lowe case le e s mean ha he a iables a e s a ed in na u al loga i hms and he subsc ip
s ands o he pe iod. Mo eo e , 𝑙𝑛𝑈𝐿𝐶𝑡= 𝑢𝑙𝑐𝑡=𝑙𝑛𝑊𝑡−𝑙𝑛𝐿𝑃𝑡= 𝑤𝑡−𝑙𝑝𝑡 , meaning ha ULC a e
di ec ly ela ed o wages (𝑊𝑡) and in e sely ela ed o labo p oduc i i y (𝐿𝑃𝑡). In heo e ical and
applied wo k, we o en ind ha some a iables ende demand- and supply-side e ec s. Fo
ins ance, closu e and con ainmen measu es and he sp ead o he i us educe consump ion by
keeping people a home ( he demand-side e ec ) and, a he same ime, hey lowe p oduc ion by
ab up ly cu ing back wo king hou s in ac o ies ( he supply-side e ec ). This means ha such
4
Jus like in Go don and S ock’s pape (1998), we will inco po a e a lagged dependen a iable; howe e , his will be
done as pa o a subsequen model e-speci ica ion.
10 Uni labo cos s and in la ion in OECD coun ies du ing he COVID-19 pandemic
PSL Qua e ly Re iew
a iables a e simul aneously ela ed o 𝑑𝑡 and 𝑠𝑡. Based on ou benchma k model (i.e., equa ion
(1)), he li e a u e e iew and he a ailabili y o da a, we speci y he ollowing ex ended equa ion:
𝑝𝑡= 𝛽0+ 𝛽1𝑢𝑙𝑐𝑡+ 𝛽2𝑖𝑡+ 𝛽3𝑞𝑡+ 𝛽4𝑑𝑐𝑟𝑡+ 𝛽5𝑖𝑠𝑢𝑡+ 𝛽6𝑐𝑜𝑣𝑖𝑑𝑡+ 𝛽7𝑠𝑖𝑡+ 𝑢𝑡 (2)
whe e 𝑖𝑡 is he policy- ela ed in e es a e, 𝑞𝑡 is he eal e ec i e exchange a e, 𝑑𝑐𝑟𝑡 is he index
o deb /con ac elie o households, 𝑖𝑠𝑢𝑡 is he income suppo index, 𝑐𝑜𝑣𝑖𝑑𝑡 is he numbe o
new COVID-19 cases smoo hed pe million, 𝑠𝑖𝑡 is he s ingency index, and 𝑢𝑡 is a dis u bance
e m. Excep o he in e es a e, all he a iables a e in na u al loga i hms. This se o a iables
keeps he model ela i ely pa simonious, is heo e ically plausible, and allows o cap u ing he
in la iona y e ec s o ULC, iscal and mone a y policies, exchange a e luc ua ions, closu e and
con ainmen measu es, and he sp ead o he i us. On he o he hand, such an equa ion pe o ms
be e han al e na i e speci ica ions om he empi ical s andpoin . Rew i ing equa ion (2) in
panel o m, we ge :
𝑝𝑖𝑡 = 𝛽0+ 𝛽1𝑢𝑙𝑐𝑖𝑡 + 𝛽2𝑖𝑖𝑡 + 𝛽3𝑞𝑖𝑡 + 𝛽4𝑑𝑐𝑟𝑖𝑡 + 𝛽5𝑖𝑠𝑢𝑖𝑡 + 𝛽6𝑐𝑜𝑣𝑖𝑑𝑖𝑡 + 𝛽7𝑠𝑖𝑖𝑡 + 𝑢𝑖𝑡 (3)
whe e subsc ip s i and deno e he coun y and he pe iod, espec i ely. Equa ion (3) is a pooled
eg ession model, which assumes ha na ions a e homogeneous. Howe e , he e a e wo
s anda d speci ica ions dealing wi h he e ogeneous na ions: he ixed e ec s (FE) and he andom
e ec s (RE) panel da a models (G eene, 2008, p. 183). The FE model allows he in e cep e m o
a y om one na ion o ano he ,
5
so we w i e 𝛽0𝑖 ins ead o 𝛽0 in equa ion (4). To es ima e 𝛽0𝑖 o
34 na ions, we u ilize 33 dummy a iables. In his manne , 𝛽0𝑖 = 𝛽0+∑𝛾𝑖𝑑𝑖𝑗
34
𝑖=2 , whe e 𝛽0 is he
in e cep e m o coun y 1 se ing as a e e ence poin , 𝑑𝑖𝑗 is he dummy a iable o he coun y
i, and 𝛾𝑖 is he co esponding in e cep e m di e en ial. So, o ins ance, 𝑑2𝑗 equals 1 when
dealing wi h coun y 2 and emains a 0 o he wise, whe eas 𝛾2 is he change in he in e cep as
we shi om coun y 1 o coun y 2. This means ha he in e cep e m o coun y 2 is gi en by
𝛽0+ 𝛾2, and so on. Thus, he FE model can be w i en as:
𝑝𝑖𝑡 = 𝛽0+∑𝛾𝑖𝑑𝑖𝑗
34
𝑖=2 + 𝛽1𝑢𝑙𝑐𝑖𝑡 + 𝛽2𝑖𝑖𝑡 + 𝛽3𝑞𝑖𝑡 + 𝛽4𝑑𝑐𝑟𝑖𝑡 + 𝛽5𝑖𝑠𝑢𝑖𝑡 + 𝛽6𝑐𝑜𝑣𝑖𝑑𝑖𝑡 + 𝛽7𝑠𝑖𝑖𝑡 + 𝑢𝑖𝑡 (4)
Acco ding o Kmen a (1986, p. 633), he he e ogenei y ac oss coun ies unde he RE model
akes he ollowing o m: 𝛽0𝑖 = 𝛽0+ 𝜀𝑖, whe e 𝐸(𝜀𝑖) = 0 and 𝐸(𝜀𝑖
2) = 𝜎2. The RE model is
app op ia e only when he he e ogenei y among coun ies is unco ela ed wi h he se en
explana o y a iables, in which case i can be inco po a ed as pa o he dis u bance e m.
6
Howe e , his assump ion is di icul o sa is y (G eene, 2008, p. 182). In ac , ollowing Kmen a
(1986), he RE model is alid only when he sample coun ies a e ob ained andomly om a much
b oade popula ion, which is no he case he e.
To add ess endogenei y unde he FE panel da a model, we use 2SLS. Pu di e en ly, 2SLS
elimina es he co ela ion be ween he eg esso s and he e o e m (𝑤𝑖𝑡), a p oblem ha b ings
abou biased and inconsis en es ima ions. To e i y ha 2SLS is obus o endogenei y, we
e alua e he alidi y o he ins umen s. We do so by showing ha he ins umen al a iables a e
basically unco ela ed wi h he esiduals o he wo models es ima ed by 2SLS. Las ly, we enhance
e iciency h ough easible gene alized leas squa es weigh s, on he one hand, and panel-
co ec ed s anda d e o s, on he o he .
5
Bu i is cons an o e ime.
6
In his case, we would ha e a compound e o e m gi en by 𝜀𝑖+ 𝑢𝑖𝑡.
V.M. Cue as Ahumada, I. Pe o ini He nández 17
The A ellano-Bond (AB) es s o se ial co ela ion appea in able 6. Such es s a e applied o
equa ion (6), whose a iables a e in i s di e ences. In his con ex , i he combined e o e m
in equa ion (5), 𝑢𝑖𝑡, is iden ically independen ly dis ibu ed, hen Δ𝑢𝑖𝑡 in equa ion (6) should
exhibi : 1) nega i e i s -o de au oco ela ion; and 2) no second-o de au oco ela ion (A ellano
and Bond, 1991). In he case o eg ession 3, he p obabili y alues o he speci ied null
hypo heses sugges ha he e is i s -o de au oco ela ion and no second-o de au oco ela ion,
jus as expec ed. In eg ession 4, we ailed o es ablish i s -o de au oco ela ion a he 10%
signi icance le el, bu he e is no second-o de au oco ela ion, as expec ed. Wha is mo e, we
ha e ha : 1) he es ima ed coe icien s o he wo eg essions a e mos ly consis en in e ms o
signs and s a is ical signi icance; 2) he whi e pe iod ins umen weigh ing ma ix used in he
es ima ion p ocess is obus o se ial co ela ion; and 3) when he numbe o c oss-sec ion uni s
is la ge han he numbe o pe iods and he ins umen s used a e alid, he AB es ima o is
consis en , ee o endogenei y issues, and basically needs no in o ma ion abou esidual beha io
(A ellano and Bond, 1991; Bal agi, 2008, p. 150).
Table 6 – A ellano-Bond (AB) es o se ial co ela ion
Es ima ed eg ession 3
Es ima ed eg ession 4
Di e ence GMM wi h qua e ly
da a
Di e ence GMM wi h semi-annual
da a
Null hypo hesis
m-s a is ic
P ob. alue
m-s a is ic
P ob. alue
No i s -o de
au oco ela ion
–2.365
0.018
–1.384
0.167
No second-o de
au oco ela ion
–0.838
0.402
–0.832
0.405
No e: GMM=gene alized me hod o momen s.
Sou ce: au ho s’ es ima ions based on da a om he da a sou ces depic ed in able A1 and he use o EViews 13.
To in e p e he empi ical e idence, we i s add ess hose indings ha a e ully consis en
ac oss econome ic p ocedu es and emedial measu es. Unde he 2SLS me hodology
( eg essions 1 and 2) and he di e ence GMM ( eg essions 3 and 4), we ind ha :
1) The es ima ed coe icien o ULC, ei he in le els o i s di e ences, is posi i e and
s a is ically signi ican a he 1% signi icance le el. The e o e, ULC ha e been a key sou ce
o in la ion in OECD na ions. This is in line wi h Che kasky’s (2022) e idence ha nominal
wages a e a sou ce o in la ion in La in Ame ica. Howe e , Che kasky employs nominal
wages as a p oxy o ULC, he eby igno ing he c i ical ole played by labo p oduc i i y.
I is also wo h men ioning ha ou e idence unde sco es he ele ance o he
employmen e en ion p og ams implemen ed du ing he pandemic (Akbulae e al.,
2020; Makin and Lay on, 2021; Céspedes e al., 2020), gi en ha he loss o quali ied
wo ke s ends o aise ULC and, consequen ly, p ices. This phenomenon occu s du ing he
eco e y phase because hose wo ke s canno be easily ec ui ed again (Céspedes e al.,
2020).
2) The es ima ed pa ame e o income suppo
is also posi i e and s a is ically signi ican a
he 1% le el, so his a iable (mainly iscal ans e s) ep esen s a sou ce o demand-pull
in la ion du ing he e e ence pe iod. This inding aligns wi h he conclusion p esen ed by
18 Uni labo cos s and in la ion in OECD coun ies du ing he COVID-19 pandemic
PSL Qua e ly Re iew
Jo dà e al. (2022), de Soy es e al. (2022), and Kliesen and Wheelock (2023), who asse
ha in la ion in he US and o he na ions was p ima ily d i en by expansiona y iscal
policies amids he a ious p oduc ion es ain s gene a ed by social dis ancing measu es
and he pandemic i sel .
3) Deb /con ac elie has a nega i e es ima ed coe icien , achie ing s a is ical signi icance
a he 1% le el in e e y eg ession. The e o e, he alle ia ion o inancial dis ess b ings
down supply-side in la iona y p essu es, which is in line wi h he Gibson pa adox as
explained by Ba h and Ramey (2001). As p e iously men ioned, hese au ho s ega d
in e es a es as a componen o uni p oduc ion cos s, especially o i ms hea ily elian
on wo king capi al inancing. Fu he mo e, ou inding con adic s Abdelka i e al. (2023),
who a gue ha deb /con ac elie ini ia i es lead o in la ion.
4) The s ingency index has a nega i e es ima ed pa ame e , which is s a is ically signi ican
a he 10% le el in eg ession 1 and a he 1% le el in he o he h ee eg essions.
Consequen ly, he ne e ec o closu e and con ainmen measu es on p ices was nega i e
du ing he 2020-2022 pe iod.
Now, unde he AB es ima o (i.e., in eg essions 3 and 4), we addi ionally obse e he
ollowing:
1) In e es a es (Δ𝑖𝑖𝑡) bea a posi i e ela ionship wi h p ices (Δ𝑝𝑖𝑡), and his esul holds a
he 1% signi icance le el in eg essions 3 and 4. The e o e, highe inancial cos s can be
in la iona y when inancial dis ess is widesp ead. This inding is consis en wi h he
e idence p o ided by Haya e al. (2021) in he speci ic case o Pakis an. Mo eo e , i
aligns wi h he Gibson pa adox, as explained by Ba h and Ramey (2001), and sheds ligh
on why deb /con ac elie policies (i.e., ansi o y measu es o educe he inancial s ain
on deb o s) a e de la iona y.
2) The ne impac o he new COVID-19 cases smoo hed pe million is in la iona y and his
e idence holds a he 1% signi icance le el.
3) The es ima ed coe icien o he lagged dependen a iable (Δ𝑝𝑖𝑡−1) is posi i e and
s a is ically signi ican a he 1% le el, indica ing ha he e is an in la iona y ine ia.
Fu he mo e, wi h he inclusion o he lagged dependen a iable, he impac o he o he
eg esso s is condi ioned by he in la iona y momen um.
The coe icien o he eal e ec i e exchange a e is s a is ically signi ican (a he 1% le el) in
eg ession 3 bu no in eg ession 4. The e o e, he e idence in a o o he pass- h ough e ec
om cu ency dep ecia ion o in la ion is ela i ely weak.
4. Conclusions and policy implica ions
This pape e alua es he key sou ces o in la ion in 34 OECD na ions du ing he COVID-19
pandemic. To ha end, we ely on an ampli ied p ice equa ion es ima ed h ough 2SLS and
di e ence GMM. One key inding is ha ULC a e a majo sou ce o p ice ins abili y. As is well
known, ULC a e di ec ly ela ed o wages and in e sely ela ed o labo p oduc i i y. In his
pe spec i e, closu e and con ainmen measu es, and he p opaga ion o he i us i sel , gene a ed
a nega i e labo supply shock (He ia and Newmeye , 2020) and hus highe ULC. Mo eo e ,
massi e layo s o ced many people o mig a e om one indus y o ano he , b inging down labo
p oduc i i y inso a as he new jobs equi ed di e en skills (Céspedes e al., 2020; Akbulae e
V.M. Cue as Ahumada, I. Pe o ini He nández 19
al., 2020). Labo p oduc i i y also ell because unemploymen e oded labo o ce quali ica ions
(Ba išić and Ko ač, 2022). The e o e, an e ec i e an i-in la iona y s a egy du ing and a e a
pandemic should include a wide ange o aining p og ams, no only o aise labo p oduc i i y
and educe ULC bu also o assis he unemployed in mee ing employe s’ demands. The need o
in es mo e in aining and educa ion is g ea e in he less ad anced economies. Mo eo e ,
opening new pa hs o legal immig a ion o weal hy na ions could inc ease labo supply and lowe
ULC.
Income suppo measu es a e a sou ce o demand-pull in la ion in all eg essions, p esumably
because hey include massi e cash ans e s o ulne able popula ion g oups. This inding is
consis en wi h he iew ha , al hough coun e cyclical iscal policies we e use ul o sa egua d
p oduc ion capaci ies and b ing down job losses, hey we e in la iona y o a ce ain deg ee.
Akbulae e al. (2020) indica e ha coun e cyclical policies we e in la iona y because hey we e
no p ope ly synch onized wi h he slow-paced no maliza ion o GSC once social dis ancing
policies we e elaxed, whe eas Niedźwiedzińska (2021) a gues ha iscal and mone a y
esponses we e ema kable in magni ude and speed o implemen a ion. The e o e, an impo an
lesson o u u e heal h c ises is ha supply-side policy packages should align wi h he scale and
eloci y o iscal and mone a y expansion.
The e idence ha deb /con ac elie policies a e de la iona y is also consis en ac oss all
eg essions. The implica ion is ha go e nmen in e en ions aimed a lessening inancial u moil
among small-business owne s can e ec i ely wo k on he supply side o educe bank up cies and
s abilize p ices. Ano he inding ha holds ac oss e e y eg ession is ha closu e and
con ainmen measu es induced a de la iona y e ec , mainly because hey led o lowe sales and
e enues in a wide spec um o business ope a ions (Meye e al., 2022). The e o e, he demand-
side e ec o social dis ancing p e ailed o e he in la iona y supply-side e ec , namely he
dis up ion o GSC.
Unde he AB es ima o , ega dless o whe he we use qua e ly o semi-annual da a, he
coe icien o he in e es a e is posi i e and s a is ically signi ican . Highe in e es a es can
exace ba e in la ion unde ce ain condi ions. Du ing he pandemic, many indus ies we e acing
lowe sales, p oduc ion bo lenecks, and deli e y p oblems. The e o e, many companies we e
s uggling o pay wages, axes, deb s, and en s (An onescu, 2020; Makin and Lay on, 2021). So,
in he p esence o inancial dis ess, ele a ed in e es a es can con ibu e o cos -push in la ion
(Ba h and Ramey, 2001; Céspedes e al., 2020; Che kasky, 2022; Cucciniello e al., 2022). This is
in line wi h he inding ha deb /con ac elie is de la iona y and calls o supply-side incen i es
such as ex ending p e e en ial c edi o capi al-cons ain en e p ises, especially o mic o, small,
and medium-sized en e p ises.
The numbe o new COVID-19 cases smoo hed pe million pu s an upwa d p essu e on p ices,
conside ing ha his a iable se es as a p oxy o he quan i y o wo ke s equi ing isola ion
pe iods due o illness. As his quan i y peaked, supply-side dis up ions became mo e c i ical, and
cos -push in la ion in ensi ied. Las ly, he e idence also sugges s ha ine ial in la ion coexis s
wi h supply- and demand-side in la ion. The highly signi ican impac o lagged p ice changes on
cu en p ice changes e lec s an in la iona y momen um which, once again, highligh s he need
o supplemen con en ional con ac iona y policies wi h inno a i e supply-side incen i es.
20 Uni labo cos s and in la ion in OECD coun ies du ing he COVID-19 pandemic
PSL Qua e ly Re iew
Appendix
Table A1 – Measu emen uni s and da a sou ces o he selec ed a iables
Va iable
Measu emen uni
Sou ce o in o ma ion
Consume p ices (𝑃𝑖𝑡)
Index wi h a base pe iod equal o 100
OECD da abase
Uni labo cos s (𝑈𝐿𝐶𝑖𝑡)
Index wi h a base pe iod equal o 100
OECD da abase
Policy- ela ed in e es a e (𝑅𝑖𝑡)
Nominal a e
Bank o In e na ional Se lemen s
(BIS) and In e na ional Mone a y
Fund (IMF)
Real e ec i e exchange a e (𝑄𝑖𝑡)
Index based on consume p ices
BIS and IMF
Deb /con ac elie o
households index (𝐷𝐶𝑅𝑖𝑡)
O dinal indica o aking on 3 possible
alues: 0, 1 and 2
Ox o d COVID-19 Go e nmen
Response T acke (OxCGRT)
Income suppo index (𝐼𝑆𝑈𝑖𝑡)
O dinal indica o aking on 3 possible
alues: 0, 1 and 2
OxCGRT
New COVID-19 cases (𝐶𝑂𝑉𝐼𝐷𝑖𝑡)
New cases smoo hed pe million
OxCGRT
S ingency index (S𝐼𝑖𝑡)
A no malized index anging om 0 o 100
OxCGRT
Re e ences
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