A New Indicator of Labor Market Tightness for Predicting Wage Inflation

Abstract

A key question in economic policy is how labor market tightness affects wage inflation and ultimately prices. In this post, we highlight the importance of two measures of tightness in determining wage growth: the quits rate, and vacancies per searcher (V/S)—where searchers include both employed and non-employed job seekers. Amongst a broad set of indicators, we find that these two measures are independently the most strongly correlated with wage inflation. We construct a new index, called the Heise-Pearce-Weber (HPW) Tightness Index, which is a composite of quits and vacancies per searcher, and show that it performs best of all in explaining U.S. wage growth, including over the COVID pandemic and recovery. 

To view post: https://libertystreeteconomics.newyorkfed.org/2024/10/a-new-indicator-of-labor-market-tightness-for-predicting-wage-inflation/

Keywords: wages, Phillips curve, labor market, inflation

JEL Classification: E24, E31