IDEAS home Printed from https://ideas.repec.org/p/fip/fedgfe/2024-50.html

(Re-)Connecting Inflation and the Labor Market: A Tale of Two Curves

Author

Abstract

We propose an empirical framework in which shocks to worker reallocation, aggregate activity, and labor supply drive the joint dynamics of the labor market and inflation, and where reallocation shocks take two forms depending on whether they result from quits or from job losses. We find that these structural shocks, which affect the Beveridge curve, have different effects on inflation. Our model fully decomposes shifts of or along the empirical Beveridge curve in terms of the contribution of each shock and also allows us to estimate the Phillips correlation associated with each shock; observed Beveridge and Phillips correlations change over time depending on what types of structural shocks predominate in a given period. We find that reallocation shocks that accompany job losses were a key source of labor market dynamics and the steepening of the reduced-form Phillips curve during the Covid-19 pandemic, and were an important driver of the post-pandemic "soft landing."

Suggested Citation

  • Hie Joo Ahn & Jeremy B. Rudd, 2024. "(Re-)Connecting Inflation and the Labor Market: A Tale of Two Curves," Finance and Economics Discussion Series 2024-050r1, Board of Governors of the Federal Reserve System (U.S.), revised 28 May 2025.
    • Handle: RePEc:fip:fedgfe:2024-50
    DOI: 10.17016/FEDS.2024.050r1
    Note: Revision
    as

    Download full text from publisher

    File URL: https://www.federalreserve.gov/econres/feds/files/2024050r1pap.pdf
    Download Restriction: no
    File URL: https://libkey.io/10.17016/FEDS.2024.050r1?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    References listed on IDEAS

    as
    1. Hie Joo Ahn, 2023. "The role of observed and unobserved heterogeneity in the duration of unemployment," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 38(1), pages 3-23, January.
    2. Lawrence J. Christiano & Martin S. Eichenbaum & Mathias Trabandt, 2016. "Unemployment and Business Cycles," Econometrica, Econometric Society, vol. 84(4), pages 1523-1569, July.
    3. Elsby, Michael W.L. & Hobijn, Bart & Şahin, Ayşegül, 2015. "On the importance of the participation margin for labor market fluctuations," Journal of Monetary Economics, Elsevier, vol. 72(C), pages 64-82.
    4. Christiane Baumeister & Gert Peersman, 2013. "Time-Varying Effects of Oil Supply Shocks on the US Economy," American Economic Journal: Macroeconomics, American Economic Association, vol. 5(4), pages 1-28, October.
    5. Baumeister, Christiane & Hamilton, James D., 2018. "Inference in structural vector autoregressions when the identifying assumptions are not fully believed: Re-evaluating the role of monetary policy in economic fluctuations," Journal of Monetary Economics, Elsevier, vol. 100(C), pages 48-65.
    6. Crump, Richard K. & Eusepi, Stefano & Giannoni, Marc & Şahin, Ayşegül, 2024. "The unemployment–inflation trade-off revisited: The Phillips curve in COVID times," Journal of Monetary Economics, Elsevier, vol. 145(S).
    7. Abraham, Katharine G & Katz, Lawrence F, 1986. "Cyclical Unemployment: Sectoral Shifts or Aggregate Disturbances?," Journal of Political Economy, University of Chicago Press, vol. 94(3), pages 507-522, June.
    8. John Haltiwanger & Steven J. Davis, 1999. "On the Driving Forces behind Cyclical Movements in Employment and Job Reallocation," American Economic Review, American Economic Association, vol. 89(5), pages 1234-1258, December.
    9. Baumeister, Christiane & Hamilton, James D., 2018. "Inference in structural vector autoregressions when the identifying assumptions are not fully believed: Re-evaluating the role of monetary policy in economic fluctuations," Journal of Monetary Economics, Elsevier, vol. 100(C), pages 48-65.
    10. Regis Barnichon & Geert Mesters, 2020. "Identifying Modern Macro Equations with Old Shocks," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 135(4), pages 2255-2298.
    11. Christiane Baumeister & James D. Hamilton, 2015. "Sign Restrictions, Structural Vector Autoregressions, and Useful Prior Information," Econometrica, Econometric Society, vol. 83(5), pages 1963-1999, September.
    12. Faccini, Renato & Melosi, Leonardo, 2023. "Job-to-Job Mobility and Inflation," CEPR Discussion Papers 17829, C.E.P.R. Discussion Papers.
    13. Ferrante, Francesco & Graves, Sebastian & Iacoviello, Matteo, 2023. "The inflationary effects of sectoral reallocation," Journal of Monetary Economics, Elsevier, vol. 140(S), pages 64-81.
    14. Michael W. L. Elsby & Ryan Michaels & David Ratner, 2015. "The Beveridge Curve: A Survey," Journal of Economic Literature, American Economic Association, vol. 53(3), pages 571-630, September.
    15. Olivier Coibion & Yuriy Gorodnichenko, 2015. "Is the Phillips Curve Alive and Well after All? Inflation Expectations and the Missing Disinflation," American Economic Journal: Macroeconomics, American Economic Association, vol. 7(1), pages 197-232, January.
    16. Jose Maria Barrero & Nicholas Bloom & Steven J. Davis, 2020. "COVID-19 Is Also a Reallocation Shock," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 51(2 (Summer), pages 329-383.
    17. Olivier J Blanchard & Alex Domash & Lawrence H. Summers, 2022. "Bad news for the Fed from the Beveridge space," Policy Briefs PB22-7, Peterson Institute for International Economics.
    18. Christiane Baumeister & James D. Hamilton, 2019. "Structural Interpretation of Vector Autoregressions with Incomplete Identification: Revisiting the Role of Oil Supply and Demand Shocks," American Economic Review, American Economic Association, vol. 109(5), pages 1873-1910, May.
    19. Regis Barnichon & Andrew Figura, 2015. "Labor Market Heterogeneity and the Aggregate Matching Function," American Economic Journal: Macroeconomics, American Economic Association, vol. 7(4), pages 222-249, October.
    20. R. Jason Faberman & Alejandro Justiniano, 2015. "Job Switching and Wage Growth," Chicago Fed Letter, Federal Reserve Bank of Chicago.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Hie Joo Ahn & Yunjong Eo, 2025. "Hysteresis and the Role of Downward Nominal Wage Rigidity: Evidence from U.S. States," Finance and Economics Discussion Series 2025-062r1, Board of Governors of the Federal Reserve System (U.S.), revised 16 Dec 2025.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Ahn, Hie Joo & Rudd, Jeremy B., 2025. "(Re-)Connecting inflation and the labor market: A tale of two curves," Journal of Monetary Economics, Elsevier, vol. 153(C).
    2. Knut Are Aastveit & Hilde C. Bjørnland & Jamie L. Cross, 2023. "Inflation Expectations and the Pass-Through of Oil Prices," The Review of Economics and Statistics, MIT Press, vol. 105(3), pages 733-743, May.
    3. Figura, Andrew & Waller, Chris, 2024. "What does the beveridge curve tell us about the likelihood of soft landings?," Journal of Economic Dynamics and Control, Elsevier, vol. 169(C).
    4. Atsushi Inoue & Lutz Kilian, 2020. "The Role of the Prior in Estimating VAR Models with Sign Restrictions," Working Papers 2030, Federal Reserve Bank of Dallas.
    5. Baumeister, Christiane & Hamilton, James D., 2020. "Drawing conclusions from structural vector autoregressions identified on the basis of sign restrictions," Journal of International Money and Finance, Elsevier, vol. 109(C).
    6. Drago Bergholt & Francesco Furlanetto & Etienne Vaccaro-Grange, 2023. "Did monetary policy kill the Phillips Curve? Some simple arithmetics," Working Paper 2023/2, Norges Bank.
    7. Szafranek, Karol & Szafrański, Grzegorz & Leszczyńska-Paczesna, Agnieszka, 2024. "Inflation returns. Revisiting the role of external and domestic shocks with Bayesian structural VAR," International Review of Economics & Finance, Elsevier, vol. 93(PA), pages 789-810.
    8. Baumeister, Christiane & Hamilton, James D., 2021. "Reprint: Drawing conclusions from structural vector autoregressions identified on the basis of sign restrictions," Journal of International Money and Finance, Elsevier, vol. 114(C).
    9. Geiger, Martin & Scharler, Johann, 2019. "How do consumers assess the macroeconomic effects of oil price fluctuations? Evidence from U.S. survey data," Journal of Macroeconomics, Elsevier, vol. 62(C).
    10. Valenti, Daniele & Bastianin, Andrea & Manera, Matteo, 2023. "A weekly structural VAR model of the US crude oil market," Energy Economics, Elsevier, vol. 121(C).
    11. Rubaszek, Michał & Szafranek, Karol & Uddin, Gazi Salah, 2021. "The dynamics and elasticities on the U.S. natural gas market. A Bayesian Structural VAR analysis," Energy Economics, Elsevier, vol. 103(C).
    12. da Silva, Nelson & Caetano, Sidney, 2024. "Intensity of labor shocks behind the changes in Brazilian hours worked during the pandemic," Economic Modelling, Elsevier, vol. 131(C).
    13. Jon Ellingsen & Caroline Espegren, 2022. "Lost in transition? Earnings losses of displaced petroleum workers," Working Papers No 06/2022, Centre for Applied Macro- and Petroleum economics (CAMP), BI Norwegian Business School.
    14. repec:ptu:bdpart:e202413 is not listed on IDEAS
    15. Valenti, Daniele & Manera, Matteo & Sbuelz, Alessandro, 2020. "Interpreting the oil risk premium: Do oil price shocks matter?," Energy Economics, Elsevier, vol. 91(C).
    16. von Schweinitz, Gregor, 2023. "The importance of credit demand for business cycle dynamics," IWH Discussion Papers 21/2023, Halle Institute for Economic Research (IWH).
    17. Kilian, Lutz, 2022. "Facts and fiction in oil market modeling," Energy Economics, Elsevier, vol. 110(C).
    18. Giacomini, Raffaella & Kitagawa, Toru & Read, Matthew, 2022. "Robust Bayesian inference in proxy SVARs," Journal of Econometrics, Elsevier, vol. 228(1), pages 107-126.
    19. Martin Geiger & Jochen Güntner, 2019. "How are oil supply shocks transmitted to the U.S. economy?," Economics working papers 2019-13, Department of Economics, Johannes Kepler University Linz, Austria.
    20. Brinca, Pedro & Duarte, Joao B. & Faria-e-Castro, Miguel, 2021. "Measuring labor supply and demand shocks during COVID-19," European Economic Review, Elsevier, vol. 139(C).
    21. Matthew Read, 2022. "The Unit-effect Normalisation in Set-identified Structural Vector Autoregressions," RBA Research Discussion Papers rdp2022-04, Reserve Bank of Australia.

    More about this item

    Keywords

    ;
    ;
    ;

    JEL classification:

    • C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • 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
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:fip:fedgfe:2024-50. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Ryan Wolfslayer ; Keisha Fournillier (email available below). General contact details of provider: https://edirc.repec.org/data/frbgvus.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.