Labor market tightness and inflation before and after the COVID-19 pandemic

Justin Bloesch ()
Additional contact information
Justin Bloesch: Cornell University

No WP24-23, Working Paper Series from Peterson Institute for International Economics

Abstract: This paper reviews evidence on the role of the labor market in driving inflation and analyzes the US labor market, and its contribution to inflation, during the COVID-19 pandemic and recovery. The author argues that the quits rate is a good measure of labor market tightness and is the best predictor of nominal wage growth. He further argues that wages largely pass through into prices, but other factors like sector-specific supply shocks are needed to explain the dynamics of price inflation. The COVID pandemic created large disruptions in the labor market, resulting in an increase in job openings and quits, high nominal wage growth, and temporary labor market mismatch. The shocks associated with COVID have subsequently faded, and nonlinearities in both the wage Phillips curve and Beveridge curve allowed for nominal wage growth to normalize without a large increase in unemployment. Lastly, the author argues that the relationship between wages and prices is mostly one-directional: Past price increases are not a major driver of wage gains. The period of high nominal wage growth in the recovery from COVID therefore reflected temporarily high labor demand as the economy quickly reopened, but not a classic wage-price spiral.

Keywords: Labor Market Tightness; Inflation; Wage Growth (search for similar items in EconPapers)
JEL-codes: E24 E31 J31 J63 (search for similar items in EconPapers)
Date: 2024-12
New Economics Papers: this item is included in nep-lab and nep-mon
References: Add references at CitEc
Citations:

Downloads: (external link)
https://www.piie.com/publications/working-papers/2 ... er-covid-19-pandemic (text/html)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:iie:wpaper:wp24-23

Access Statistics for this paper

More papers in Working Paper Series from Peterson Institute for International Economics Contact information at EDIRC.
Bibliographic data for series maintained by Peterson Institute webmaster ().