Working Paper: CEPR ID: DP13628
Authors: Leonardo Melosi; Renato Faccini
Abstract: The low rate of inflation observed in the U.S. over the entire past decade is hard to reconcile with traditional measures of labor market slack. We show that an alternative notion of slack that encompasses workers' propensity to search on the job explains this missing inflation. We derive this novel concept of slack from a model in which a drop in the on-the-job search rate lowers the intensity of interfirm wage competition to retain or hire workers. The on-the-job search rate can be measured directly from aggregate labor-market flows and is countercyclical. Its recent drop is corroborated by micro data.
Keywords: Missing Inflation; On-the-job Search; Employment-to-employment Rate; Labor Market Slack; Phillips Curve; Cyclical Misallocation; Micro Data; Heterogeneous Agents
JEL Codes: E31; E37; C32
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| on-the-job search rate (J68) | inter-firm wage competition (J39) |
| inter-firm wage competition (J39) | expected labor costs (J39) |
| expected labor costs (J39) | inflationary pressures (E31) |
| on-the-job search rate (J68) | inflation (E31) |
| on-the-job search rate (J68) | low-productivity jobs (J29) |
| low-productivity jobs (J29) | inflation (E31) |