By labor market slack, we mean an indicator of the inflationary In this Chicago Fed Letter, we construct a new, and more comprehensive, measure of labor market slack (following recent work in FacciniĪnd Melosi, 2021) that takes into account the effects of on-the-job search (search by employed workers) on wage competition and inflation in addition to the role of unemployment. In this context, if employed workers search more, wageĬompetition among employers increases, leading to an increase in inflationary pressures if they search less, wage competition falls and inflationary pressures decrease.
And if a worker is particularly valued by their own employer, they may be offered a pay raise that is necessary to retain them in their current job.
The firm that intends to poach the worker from their current employer has to offer a sufficiently 2 The idea is as follows:īy applying for jobs in a different firm, employed workers can elicit wage competition between the current employer and the new candidate employer. However, recent research has shown that competition among employers to hire or retain workers may explain the positive relationship between job-to-job mobility and inflation. Competition among employers to hire or retain workers may explain the positive relationship between job-to-job mobility and inflation. This positive relationship between quit rate and inflation may be surprising at first, because we might expect that a higher propensity of employed workers to search for new jobs wouldĮxpand the supply of labor, lowering labor costs. Rate increases often predate periods of higher inflation.
Research has established a strong and positive relationship between the share of employed workers quitting their jobs (quit rate) and the rate of wage and price inflation.
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