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A Theory of How Workers Keep Up With Inflation

Author

Listed:
  • Hassan Afrouzi
  • Andrés Blanco
  • Andrés Drenik
  • Erik Hurst

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 Blanco & Andrés Drenik & Erik Hurst, 2024. "A Theory of How Workers Keep Up With Inflation," NBER Working Papers 33233, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:33233
    Note: EFG LS ME
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    Cited by:

    1. Ina Hajdini & Edward S. Knotek & John Leer & Mathieu Pedemonte & Robert W. Rich & Raphael Schoenle, 2022. "Low Passthrough from Inflation Expectations to Income Growth Expectations: Why People Dislike Inflation," Working Papers 22-21R, Federal Reserve Bank of Cleveland, revised 27 Mar 2023.
    2. Isaac Baley & Andrés Blanco, 2022. "The Macroeconomics of Irreversibility," Working Papers 1312, Barcelona School of Economics.
    3. Andres Blanco, 2025. "Labor Market Dynamics During the 2021-24 Inflation Surge," Policy Hub, Federal Reserve Bank of Atlanta, vol. 2025(3), June.
    4. Mark Setterfield, 2025. "The COVID pandemic and its aftermath: missed opportunities for avoiding a future of Authoritarian Neoliberalism," Working Papers 2510, New School for Social Research, Department of Economics.

    More about this item

    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
    • J30 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - General
    • J63 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Turnover; Vacancies; Layoffs

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