A composite index for workers’ bargaining power and the inflation rate in the United States, 1960–2018

Abstract

This paper aims to construct a synthetic index of workers’ bargaining power and investigate the relationship between it and inflation in the U.S. economy. As a first step, we identify the factors affecting the bargaining power of workers, referring to different groups of variables: labour market indicators; institutional indicators (e.g., collective bargaining coverage, union density); characteristics of the economy (e.g., degree of freedom for capital mobility, share of employment by sector). We then implement Principal Component Analysis (PCA) to assess the adequacy of the indicators and calculate the weights to aggregate the single indicators into a composite index. As a second step, we estimate the impact of our Bargaining Index on inflation by estimating an equation of the determinants of inflation. The composite index thus has a twofold use: it sheds light on the extent to which changes in the labour market in recent decades have weakened workers’ bargaining power, and it can be used to test how the evolution of the wage bargaining system affects inflation.