Labour market flows, unemployment and the Phillips curve

Enisse Kharroubi and Marius Koechlin

No 1341, BIS Working Papers from Bank for International Settlements

Abstract: We present empirical evidence from the United States demonstrating that labour market flows provide valuable insights into subsequent wage and price inflation. Specifically, we introduce a novel measure of the unemployment gap, defined as the difference between the unemployment rate implied by current labour market transitions -referred to as "flow-based unemployment"- and the observed, or stock-based unemployment, rate. Our findings reveal that inflationary pressures tend to subside when the unemployment gap becomes positive, i.e., when flow-based unemployment exceeds stock-based unemployment. To further investigate this relationship, we develop a search-and-matching model incorporating nominal wage rigidities and persistent (non-i.i.d.) shocks. In this framework, while firms face wage rigidities, they retain the ability to negotiate wages with new hires, making firms' bargaining power endogenous and dependent on both stock- and flow-based unemployment. Consistent with our empirical results, the model demonstrates that a larger unemployment gap-whether driven by higher flow-based unemployment or lower stock-based unemployment-typically leads to lower wages, provided that shocks to transition probabilities exhibit sufficient persistence.

Keywords: labour market flows; unemployment gap; search-and-matching; nominal rigidities; inflation; Phillips curve (search for similar items in EconPapers)
JEL-codes: E23 E24 E31 E32 E52 J64 (search for similar items in EconPapers)
Date: 2026-03
New Economics Papers: this item is included in nep-mon
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