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A principal components approach to estimating labor market pressure and its implications for inflation

Author

Listed:
  • Michelle L. Barnes
  • Ryan Chahrour
  • Giovanni P. Olivei
  • Gaoyan Tang

Abstract

We build a summary measure of labor market pressure that captures the common movement among a variety of labor market series. Obtained as the labor market series? first principal component, this measure explains a large portion of the variability of the underlying series. For this reason, it is a good summary indicator of labor market pressure. We show that the unemployment rate gap has tracked this summary measure closely over the past 35 years. At times, however, the summary measure and the unemployment rate gap have sent somewhat different signals. In terms of relying on the principal components summary measure vis--vis the unemployment rate gap for explaining inflation, we argue that the recent evolution of wage inflation is more consistent with the evolution of the summary measure than with the unemployment rate gap. This is because over the past two years the principal components summary measure has been suggesting less labor market pressure than the unemployment rate gap. Over the past 35 years, however, there is little systematic evidence favoring the summary measure of labor market pressure over the unemployment rate gap as a predictor of inflation.

Suggested Citation

  • Michelle L. Barnes & Ryan Chahrour & Giovanni P. Olivei & Gaoyan Tang, 2007. "A principal components approach to estimating labor market pressure and its implications for inflation," Public Policy Brief, Federal Reserve Bank of Boston.
    • Handle: RePEc:fip:fedbpb:y:2007:n:07-2
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    Citations

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    Cited by:

    1. Hess T. Chung & Bruce Fallick & Christopher J. Nekarda & David Ratner, 2014. "Assessing the Change in Labor Market Conditions," Finance and Economics Discussion Series 2014-109, Board of Governors of the Federal Reserve System (U.S.).
    2. Albuquerque, Bruno & Baumann, Ursel, 2017. "Will US inflation awake from the dead? The role of slack and non-linearities in the Phillips curve," Journal of Policy Modeling, Elsevier, vol. 39(2), pages 247-271.
    3. Troy Gilchrist & Bart Hobijn, 2021. "The Divergent Signals about Labor Market Slack," FRBSF Economic Letter, Federal Reserve Bank of San Francisco, vol. 2021(15), pages 01-06, June.
    4. Deicy J. Cristiano-Botia & Manuel Dario Hernandez-Bejarano & Mario A. Ramos-Veloza, 2021. "Labor Market Indicator for Colombia (LMI)," Borradores de Economia 1152, Banco de la Republica de Colombia.

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