DP13628 Bad Jobs and Low Inflation

Author(s): Renato Faccini, Leonardo Melosi
Publication Date: March 2019
Date Revised: February 2021
Keyword(s): Cyclical Misallocation, employment-to-employment rate, Heterogeneous Agents, labor market slack, Micro data, Missing inflation, on-the-job search, Phillips curve
JEL(s): C32, E31, E37
Programme Areas: Monetary Economics and Fluctuations
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=13628

The low rate of inflation observed in the U.S. over the entire past decade is hard to reconcile with traditional measures of labor market slack. We show that an alternative notion of slack that encompasses workers' propensity to search on the job explains this missing inflation. We derive this novel concept of slack from a model in which a drop in the on-the-job search rate lowers the intensity of interfirm wage competition to retain or hire workers. The on-the-job search rate can be measured directly from aggregate labor-market flows and is countercyclical. Its recent drop is corroborated by micro data.