The Search Costs of Inflation in the Labor Market

Laura Pilossoph, Jane M. Ryngaert and Jesse J. Wedewer

No 35369, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: This paper studies the effect of unanticipated inflation in the labor market. When wages are contracted in nominal terms, inflation reduces real wages, leading workers to intensify on-the-job search to obtain wage-adjusting outside offers. Both the search effort and the resulting job mobility are costly, yet that same mobility raises output by moving workers toward more productive matches. To quantify these costs and benefits, we extend the canonical job ladder of Postel-Vinay and Robin (2002) to a nominal environment with privately chosen search effort, and calibrate it to standard moments from the pre-pandemic US labor market. A one-time inflation shock scaled to the COVID episode generates an average welfare loss of 0.44% of consumption, with workers at the top of the wage distribution bearing losses over six times those at the bottom. Once the offsetting transfer of surplus to firms and productivity gains from reallocation are accounted for, the net aggregate cost is close to zero. Second, inflation volatility imposes asymmetric costs: worker welfare is approximately invariant to the volatility regime because firms compensate workers for expected search costs at hiring, but social welfare declines meaningfully because the resource cost of search effort is not undone by compensation. This second finding identifies a distinct, labor-market source of welfare costs from inflation volatility, complementing the price-dispersion costs emphasized in the New Keynesian literature.

JEL-codes: E0 E24 E31 J63 (search for similar items in EconPapers)
Date: 2026-06
New Economics Papers: this item is included in nep-dge and nep-mon
Note: EFG
References: Add references at CitEc
Citations:

Downloads: (external link)
http://www.nber.org/papers/w35369.pdf (application/pdf)
Access to the full text is generally limited to series subscribers, however if the top level domain of the client browser is in a developing country or transition economy free access is provided. More information about subscriptions and free access is available at http://www.nber.org/wwphelp.html. Free access is also available to older working papers.

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:nbr:nberwo:35369

Ordering information: This working paper can be ordered from
http://www.nber.org/papers/w35369
The price is Paper copy available by mail.

Access Statistics for this paper

More papers in NBER Working Papers from National Bureau of Economic Research, Inc National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.. Contact information at EDIRC.
Bibliographic data for series maintained by ().