DP13628 Bad Jobs and Low Inflation

Author(s): Renato Faccini, Leonardo Melosi
Publication Date: March 2019
Keyword(s): Cyclical Misallocation, Job Ladder, labor productivity, Phillips curve
JEL(s): C78, E24, E31
Programme Areas: Monetary Economics and Fluctuations
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=13628

In a dynamic general equilibrium model with a job ladder, inflation rises when most workers are employed in high-productivity jobs because in this case, poaching leads to wage increases that are not backed by changes in productivity. The model predicts that the post-Great Recession drop in the job-to-job flow rate has significantly slowed the pace at which the U.S. labor market turns low-productivity jobs into high-productivity ones. As a result, inflation has fallen below trend for an entire decade, despite the marked decline in the unemployment rate. The impaired process of reallocation over the job ladder accounts for a one-percentage-point reduction in U.S. labor productivity relative to trend, contributing to explain the stagnant productivity of the current economic recovery.