Economists often teach a neat trade-off: a bit more inflation can buy you more jobs. It is called the Phillips curve. But when Dr. Nuroğlu and I turned to Bosnia and Herzegovina, the story changed. What we found in the data challenged one of the most established “rules” in economics.
Contrary to expectations
Between April 2008 and June 2012 the data show that inflation rose along with unemployment — not the opposite. In plain terms: prices climbed, but employers did not hire. That is the opposite of what the textbook Phillips curve predicts.
Wages That Matter — Real, Not Nominal
Wage raises looked promising at first glance. But the researchers found that nominal wage increases (the number on the paycheck) did not lead to more jobs. Only real wage increases — wages that actually buy more goods and services after inflation — were tied to higher employment. In short: paychecks that do not keep up with prices do not help workers or the labor market.
Not All Places Are the Same
In the Federation of Bosnia and Herzegovina and in Brčko District, higher real pay was linked to better employment outcomes. In Republika Srpska the evidence was inconclusive, likely because there were only 13 observations for that region — too few to say much.
Why This Matters for Ordinary People
Bosnia’s currency is pegged to the euro, so when European inflation rises, Sarajevo feels it quickly. If wages do not keep pace, families lose purchasing power and jobs can fall. Policymakers who hope inflation will fix unemployment may find themselves disappointed — or worse, making things harder for the people they want to help.
Final Thought
This is a reminder that economic rules are not one-size-fits-all. What works in a big, diversified economy may not work in a small, post-conflict country with a fixed exchange arrangement. For Bosnia, raising real incomes looks like a better path to jobs than hoping inflation will do the work.
Read the full study: Omerčević, E., & Nuroğlu, E. (2014). Phillips and Wage Curves: Empirical Evidence from Bosnia and Herzegovina.Economics Research International.
