Bad Jobs and Low Inflation

Renato Faccini and Leonardo Melosi

Since 2014 the U.S. economy has been characterized by (i) a tight labor market with a record-low unemployment rate and very high job finding rates, (ii) disappointing labor productivity growth, and (iii) low inflation. We propose a model with the job ladder that can reconcile these three facts. In the model inflation picks up only when most jobs are concentrated at the high rung of the ladder: as firms compete for efficiently allocated employed workers, outside offers are declined and matched, triggering an increase in production costs that is not backed by an increase in productivity. The model is estimated using unemployment and quit rates, which allow the model to precisely identify the distribution of the quality of jobs. After the Great Recession, the observed structural drop in the job-to-job rate has slowed down the pace at which the U.S. labor market turns bad jobs into good jobs. As a result, inflation has not escalated even though the labor market appears to be very tight. Furthermore, the model predicts that labor productivity persistently fell by up to 70 bps in the post-Great Recession recovery owing to this protracted misallocation in the labor market.

This paper addresses an important question that is puzzling many in an elegant way. However, I am still left hungry: what triggered that change in job-to-job transitions that is taken exogenously here?


One Response to Bad Jobs and Low Inflation

  1. rfaccini says:

    In our model the key driver of the results is the countercyclical behavior of the rate of on the job search, which we show it can be exactly identified from the joint dynamics of the macro time series for UE and EE flows. This is consistent with the findings of Faberman and Kudliak (2016), the only paper we know of, which measures search intensity at micro levels in a dataset that comprises workers with a job. However, very little is known yet about the reasons for this cyclicality, mainly due to the scarcity of information about on the job search. It may be that workers with a job have more incentives to search in recession, when income risk is higher. Or it may be that after years of recovery, unsuccessful on-the-job seekers search less as they become discouraged.

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