What Does Economic Theory Tell Us About Labour Market Tightness?

Bank of England Working Paper No. 185

44 Pages Posted: 22 Sep 2003

See all articles by Andrew Brigden

Andrew Brigden

Bank of England

Jonathan Thomas

Bank of England - Structural Economic Analysis Division

Date Written: 2003

Abstract

Labour market tightness is a phrase often used by commentators and policy-makers, but it is rarely defined. In this paper, the phrase 'labour market tightness' is interpreted as describing the balance between the demand for, and the supply of, labour. A logical consequence of this approach is that tightness is not a helpful concept in those models of the labour market, such as the standard competitive and the basic matching model, where there are insufficient rigidities to create imbalances between labour demand and supply. It is proposed that changes in the labour share of income are a convenient yardstick for measuring changes in labour market tightness. In response to certain kinds of shock, changes in the labour share will give misleading signals, but this is likely to occur less frequently than with other oft-cited tightness indicators such as the unemployment rate or the employment rate. The paper concludes by considering the links between labour market tightness and inflation. A key lesson from this analysis is that any attempt to infer the relationships between labour market tightness, various market indicators of it, and inflation, requires both a clear definition of tightness and depends on the specific model of the labour market.

Keywords: Labour market tightness, labour share, inflation

JEL Classification: E240, E310, J230

Suggested Citation

Brigden, Andrew and Thomas, Jonathan Mashe, What Does Economic Theory Tell Us About Labour Market Tightness? (2003). Bank of England Working Paper No. 185, Available at SSRN: https://ssrn.com/abstract=425789 or http://dx.doi.org/10.2139/ssrn.425789

Andrew Brigden (Contact Author)

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

Jonathan Mashe Thomas

Bank of England - Structural Economic Analysis Division ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

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