Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/272798 
Authors: 
Year of Publication: 
2022
Series/Report no.: 
IES Working Paper No. 25/2022
Publisher: 
Charles University in Prague, Institute of Economic Studies (IES), Prague
Abstract: 
This article explores the relationship between labor costs and price inflation under two conditions. Firstly, with linear assumption and classical techniques. Secondly, without assuming linearity, by a novel non-parametric machine learning method, namely gradient boosting. With quarterly data from 1996 to 2022 for V4 countries, we find linear and non-linear dependency between labor cost and price inflation. However, the magnitude of the connection is country-specific and changes over time. Our findings indicate that a significant linear relationship between considered variables does not lead to the higher predictability power of labor cost in a non- parametric model, which predicts inflation. Even opposed, the Czech Republic, the country with the highest correlation between unit labor cost(ULC) and deflator, shows better prediction in a case when the ULC is not in the set of independent variables. This fact highlights the importance of non-linearity for the inflation model.
Subjects: 
inflation
labor cost
non-linear model
V4 countries
JEL: 
E24
E31
E37
Document Type: 
Working Paper

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