Working Paper: NBER ID: w29910
Authors: Alex Domash; Lawrence H. Summers
Abstract: This paper uses historical labor market data to assess the plausibility that the Federal Reserve can engineer a soft landing for the economy. We first show that the labor market today is significantly tighter than implied by the unemployment rate: the 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. We highlight that the super-tight labor market coincides with current wage inflation of 6.5 percent – the highest level experienced in the past 40 years – and that firm-side slack measures predict further increases in wage inflation over the coming year. Finally, we show that high levels of wage inflation have historically been associated with a substantial risk of a recession over the next one to two years. We argue that periods that historically have been hailed as successful soft landings have little in common with the present moment. Our results suggest a very low likelihood that the Federal Reserve can reduce inflation without causing a significant slowdown in economic activity.
Keywords: labor market; inflation; Federal Reserve; soft landing; recession
JEL Codes: E31; J11; J23; J3
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| labor market tightness (J20) | wage inflation (J31) |
| wage inflation (J31) | price inflation (E31) |
| wage inflation (J31) | recession risk (E32) |
| labor market tightness (J20) | recession risk (E32) |
| tight labor market (J29) | economic slowdown (E32) |