Bad Jobs and Low Inflation

Faccini, Renato; Melosi, Leonardo

doi:10.21033/wp-2020-09

Working Paper

Bad Jobs and Low Inflation

Abstract: We study a model in which firms compete to retain and attract workers searching on the job. A drop in the rate of on-the-job search makes such wage competition less likely, reducing expected labor costs and lowering inflation. This model explains why inflation has remained subdued over the last decade, which is a conundrum for general equilibrium models and Phillips curves. Key to this success is the observed slowdown in the recovery of the employment-to-employment transition rate in the last five years, which is interpreted by the model as a decline in the share of employed workers searching for a job. This fall in the on-the-job search rate is corroborated by the micro data.

Keywords: Missing inflation; on-the-job search; employment-to-employment rate; labor market slack; Phillips curve; cyclical misallocation; micro data; heterogeneous agents;

JEL Classification: C32; E31; E37;

https://doi.org/10.21033/wp-2020-09