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A Theory of How Workers Keep Up With Infl ation

Author

Listed:
  • Hassan Afrouzi

    (Columbia University)

  • Andrés Esteban Blanco

    (FRB Atlanta)

  • Andrés Drenik

    (UT Austin)

  • Erik Hust

    (Chicago Booth)

Abstract

In this paper, we develop a model that combines elements of modern macro labor theories with nominal wage rigidities to study the consequences of unexpected inflation on the labor market. The slow and costly adjustment of real wages within a match after a burst of inflation incentivizes workers to engage in job-to-job transitions. Such dynamics after a surge in inflation lead to a rise in aggregate vacancies relative to unemployment, associating a seemingly tight labor market with lower average real wages. Calibrating with pre-2020 data, we show the model can simultaneously match the trends in worker flows and wage changes during the 2021-2024 period. Using historical data, we further show that prior periods of high inflation were also associated with an increase in vacancies and an upward shift in the Beveridge curve. Finally, we show that other “hot labor market” theories that can cause an increase in the aggregate vacancy-to-unemployment rate have implications that are inconsistent with the worker flows and wage dynamics observed during the recent inflationary period. Collectively, our calibrated model implies that the recent inflation in the United States, all else equal,reduced the welfare of workers through real wage declines and other costly actions, providing a model-driven reason why workers report they dislike inflation.

Suggested Citation

  • Hassan Afrouzi & Andrés Esteban Blanco & Andrés Drenik & Erik Hust, 2025. "A Theory of How Workers Keep Up With Infl ation," Working Papers 358, Red Nacional de Investigadores en Economía (RedNIE).
  • Handle: RePEc:aoz:wpaper:358
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    File URL: https://rednie.eco.unc.edu.ar/files/DT/358.pdf
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    References listed on IDEAS

    as
    1. John Grigsby & Erik Hurst & Ahu Yildirmaz, 2021. "Aggregate Nominal Wage Adjustments: New Evidence from Administrative Payroll Data," American Economic Review, American Economic Association, vol. 111(2), pages 428-471, February.
    2. Robert J. Barro, 1972. "A Theory of Monopolistic Price Adjustment," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 39(1), pages 17-26.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Inflation; Vacancies; Job-to-Job Flows; Beveridge Curve; Wage Growth;
    All these keywords.

    JEL classification:

    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials
    • J63 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Turnover; Vacancies; Layoffs

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