Working Paper: NBER ID: w29739
Authors: Alex Domash; Lawrence H. Summers
Abstract: Since the outset of the Covid-19 pandemic, labor market indicators that traditionally move together have been sending different signals about the degree of slack in the U.S. labor market. While some indicators on the supply-side, such as the prime-age employment-to-population ratio, suggest that there is still some slack in the labor market, other indicators on the demand-side, such as the job vacancy rate and the quits rate, imply that the labor market is already very tight. In light of these divergent signals, this paper compares alternative labor market indicators as predictors of wage inflation. Using national time series and state cross-section data, we find (i) unemployment is a better predictor of wage inflation than non-employment and (ii) vacancy rates and quit rates have substantial predictive power for wage inflation. We highlight the fact that vacancy and quit rates currently experienced in the United States correspond to a degree of labor market tightness previously associated with sub-2 percent unemployment rates. Finally, we show that predicted firm-side unemployment has dominant explanatory power with respect to subsequent inflation. Our results, along with a cursory analysis of labor force participation information, suggest that labor market tightness is likely to contribute significantly to inflationary pressure in the United States for some time to come.
Keywords: No keywords provided
JEL Codes: E24; J2; J23; J3
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| U3 unemployment rate (J64) | wage inflation (J31) |
| prime-age employment ratio (J49) | wage inflation (J31) |
| job vacancy rate (J63) | wage inflation (J31) |
| quits rate (J63) | wage inflation (J31) |
| predicted firm-side unemployment rate (J64) | wage inflation (J31) |
| labor market tightness (J20) | inflationary pressure (E31) |