Job-to-Job Mobility and Inflation

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, employment-to-employment rate, micro data

JEL Classification: E31, E37, C32