A Theory of How Workers Keep Up With Inflation

Hassan Afrouzi, Andrés Blanco, Andrés Drenik and Erik Hurst

No 33233, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: In this paper, we develop a model that combines elements of modern macro labor theories with nominal wage rigidities to study the consequences of unexpected inflation on the labor market. The slow and costly adjustment of real wages within a match after a burst of inflation incentivizes workers to engage in job-to-job transitions. Such dynamics after a surge in inflation lead to a rise in aggregate vacancies relative to unemployment, associating a seemingly tight labor market with lower average real wages. Calibrating with pre-2020 data, we show the model can simultaneously match the trends in worker flows and wage changes during the 2021-2024 period. Using historical data, we further show that prior periods of high inflation were also associated with an increase in vacancies and an upward shift in the Beveridge curve. Finally, we show that other “hot labor market” theories that can cause an increase in the aggregate vacancy-to-unemployment rate have implications that are inconsistent with the worker flows and wage dynamics observed during the recent inflationary period. Collectively, our calibrated model implies that the recent inflation in the United States, all else equal, reduced the welfare of workers through real wage declines and other costly actions, providing a model-driven reason why workers report they dislike inflation.

JEL-codes: E24 E31 J30 J63 (search for similar items in EconPapers)
Date: 2024-12
New Economics Papers: this item is included in nep-dge and nep-lab
Note: EFG LS ME
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Citations: View citations in EconPapers (1)

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