Discussion Paper
A New Indicator of Labor Market Tightness for Predicting Wage Inflation
Abstract: A key question in economic policy is how labor market tightness affects wage inflation and ultimately prices. In this post, we highlight the importance of two measures of tightness in determining wage growth: the quits rate, and vacancies per searcher (V/S)—where searchers include both employed and non-employed job seekers. Amongst a broad set of indicators, we find that these two measures are independently the most strongly correlated with wage inflation. We construct a new index, called the Heise-Pearce-Weber (HPW) Tightness Index, which is a composite of quits and vacancies per searcher, and show that it performs best of all in explaining U.S. wage growth, including over the COVID pandemic and recovery.
Keywords: wages; labor market; Phillips curve; inflation;
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Bibliographic Information
Provider: Federal Reserve Bank of New York
Part of Series: Liberty Street Economics
Publication Date: 2024-10-09
Number: 20241009