Wage Setting in Times of High and Low Inflation

The post-pandemic 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 state dependence in wage setting across high and low inflation periods. Wage adjustment occurs along the extensive and intensive margins: the average duration of wage agreements shortens from 14.2 to 12.9 months, while adjustment per pay round increases from 2–4% to 4–6%. Newly compiled union-level panel data on collective bargaining outcomes confirm these patterns. These facts are difficult to reconcile with purely time-dependent wage-setting models but consistent with state-dependent wage setting. Using the observed wage-duration distributions, we quantify the extent to which the Generalized Wage Phillips Curve (GWPC) steepens in times of high inflation. Embedding the GWPC constructed from our firm-level and union-level data in a New Keynesian model, we find that the sacrifice ratio falls by about 13–23% in the high-inflation regime.