Changing Jobs to Fight Inflation: Labor Market Reactions to Inflationary Shocks

Gorkem Bostanci, Omer Koru () and Sergio Villalvazo
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Omer Koru: https://econ.la.psu.edu/people/oqk5084/

No 2025-042, Finance and Economics Discussion Series from Board of Governors of the Federal Reserve System (U.S.)

Abstract: We argue that inflationary shocks affect allocative efficiency by changing the rate and the characteristics of workers’ job-to-job transitions. First, using monetary policy shocks and survey data on search effort, we empirically show that a one percentage point rise in inflation increases job-to-job transitions by up to 4.5%, and workers with higher inflation expectations are more likely to search and do so more effectively. Second, we build a general equilibrium model of directed on-the-job search to quantify the aggregate implications of labor market reactions. Higher-than-expected inflation reduces real wages, prompting workers to search more actively and aim lower. This increases job-to-job transitions but lowers the efficiency gains per transition. Therefore, the effect on output is ambiguous. Last, we calibrate the model to the U.S. economy. Inflationary shocks increase reallocation rates, yet allocative efficiency and output decline. Small deflationary shocks (e.g., 2%) increase output in the short run, while others decrease it.

Keywords: Inflation; Job-to-job flows; Worker reallocation (search for similar items in EconPapers)
JEL-codes: E24 E31 J31 (search for similar items in EconPapers)
Pages: 73 p.
Date: 2025-06-04
New Economics Papers: this item is included in nep-dge, nep-lma and nep-mon
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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedgfe:2025-42

DOI: 10.17016/FEDS.2025.042

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