Rising Labor Costs Exert Tenacious Effects on Inflation

GENG Qiang1 , FU Wenlin 2  and FU Tan3

1Center for Yangtze River Delta Economics & Social Development Research, Nanjing University, Nanjing, China Institute of Industrial Economics, Chinese Academy of Social Sciences, Beijing, China

2,3 School of Economics, Nanjing University, Nanjing, China
Abstract: With diminishing population divident, rising labor costs will become a medium- to long-term trend and this change will significantly affect price formation and
the direction of development in China. This paper uses a New Keynesian Phillips Curve

(NKPC) model to conduct empirical analysis on all possible drivers of inflation in China. The authors conclude that while monetary expansion and expectation on inflation both have significant, driving impacts on China’s inflation, rising labor costs have also become an important driver of China’s rising prices. They argue that the solution to China’s inflation problem lies not in currency policy and currency controls alone; it must be complemented by other policies that address the root causes of inflation.

Key words: labor cost, inflation, New Keynesian Phillips Curve

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