Working Paper: CEPR ID: DP17829
Authors: Renato Faccini; Leonardo Melosi
Abstract: The low rate of inflation observed in the U.S. over the past decade is hard to reconcile with traditional measures of labor market slack. We develop a theory-based indicator of interfirm wage competition that can explain the missing inflation. Key to this result is a drop in the rate of on-the-job search, which lowers the intensity of interfirm wage competition to retain or hire workers. We estimate the on-the-job search rate from aggregate labor-market flows and show that its recent drop is corroborated by survey data. During "the great resignation", the indicator of interfirm wage competition rose, raising inflation by around 1 percentage point during most of 2021.
Keywords: Missing Inflation; Labor Market Slack; Phillips Curve
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 |
|---|---|
| Decline in on-the-job search rate (J64) | Reduced interfirm wage competition (J39) |
| Reduced interfirm wage competition (J39) | Lower inflationary pressures (E31) |
| Decline in on-the-job search rate (J64) | Lower inflationary pressures (E31) |
| Lower on-the-job search rate (J64) | Increased likelihood of firms filling vacancies with unemployed workers (J68) |
| Increased likelihood of firms filling vacancies with unemployed workers (J68) | Reduced wage competition (J39) |
| Reduced wage competition (J39) | Lower inflationary pressures (E31) |
| Labor market conditions (J29) | Influence dynamics of inflation (E31) |