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Unemployment, labor costs, and recessions: implications for the inflation outlook


  • Fee, Kyle
  • Schweitzer, Mark E.


Economists have been arguing about the connection between unemployment and infl ation for decades. Critics claim that the connection is unreliable and leads policymakers astray, while others argue that the relationship is useful for forecasting. We examine the more direct connections between elevated unemployment levels and the rate of increase in wage and labor costs, more generally. We fi nd that wage and labor cost growth has declined markedly following recent recessions. It has again declined sharply in the most recent recession. We also fi nd that compensation typically remains subdued during the initial phases of recent recoveries. This is again the case in the current recovery, making labor costs a significant restraining force on inflation going forward.

Suggested Citation

  • Fee, Kyle & Schweitzer, Mark E., 2011. "Unemployment, labor costs, and recessions: implications for the inflation outlook," Economic Commentary, Federal Reserve Bank of Cleveland, issue Sept.
  • Handle: RePEc:fip:fedcec:y:2011:i:sept7:n:2011-17

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    References listed on IDEAS

    1. Ohanian, Lee & Raffo, Andrea & Rogerson, Richard, 2008. "Long-term changes in labor supply and taxes: Evidence from OECD countries, 1956-2004," Journal of Monetary Economics, Elsevier, vol. 55(8), pages 1353-1362, November.
    2. Murat Tasci & Saeed Zaman, 2010. "Unemployment after the recession: a new natural rate?," Economic Commentary, Federal Reserve Bank of Cleveland, issue Sep.
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    Cited by:

    1. Knotek, Edward S. & Zaman, Saeed, 2014. "On the Relationships between Wages, Prices, and Economic Activity," Economic Commentary, Federal Reserve Bank of Cleveland, issue Aug.


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