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Bad Jobs and Low Inflation

Author

Listed:
  • Renato Faccini

    (Queen Mary University)

  • Leonardo Melosi

    (Chicago Fed)

Abstract

Since 2014 the U.S. economy has been characterized by (i) a tight labor market with a record-low unemployment rate and very high job finding rates, (ii) disappointing labor productivity growth, and (iii) low inflation. We propose a model with the job ladder that can reconcile these three facts. In the model inflation picks up only when most jobs are concentrated at the high rung of the ladder: as firms compete for efficiently allocated employed workers, outside offers are declined and matched, triggering an increase in production costs that is not backed by an increase in productivity. The model is estimated using unemployment and quit rates, which allow the model to precisely identify the distribution of the quality of jobs. After the Great Recession, the observed structural drop in the job-to-job rate has slowed down the pace at which the U.S. labor market turns bad jobs into good jobs. As a result, inflation has not escalated even though the labor market appears to be very tight. Furthermore, the model predicts that labor productivity persistently fell by up to 70 bps in the post-Great Recession recovery owing to this protracted misallocation in the labor market.

Suggested Citation

  • Renato Faccini & Leonardo Melosi, 2019. "Bad Jobs and Low Inflation," 2019 Meeting Papers 970, Society for Economic Dynamics.
  • Handle: RePEc:red:sed019:970
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    References listed on IDEAS

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    1. Luca Sala & Ulf Söderström & Antonella Trigari, 2013. "Structural and Cyclical Forces in the Labor Market during the Great Recession: Cross-Country Evidence," NBER International Seminar on Macroeconomics, University of Chicago Press, vol. 9(1), pages 345-404.
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    3. Christopher Huckfeldt & Antonella Trigari & Mark Gertler, 2015. "Unemployment Fluctuations, Match Quality, and the Wage Cyclicality of New Hires," 2015 Meeting Papers 438, Society for Economic Dynamics.
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    12. Faberman, R. Jason & Justiniano, Alejandro, 2015. "Job Switching and Wage Growth," Chicago Fed Letter, Federal Reserve Bank of Chicago.
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    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. Bad Jobs and Low Inflation
      by Christian Zimmermann in NEP-DGE blog on 2019-10-19 20:21:04

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    Cited by:

    1. Richard A. Ashley & Randall J. Verbrugge., 2006. "Mis-Specification in Phillips Curve Regressions: Quantifying Frequency Dependence in This Relationship While Allowing for Feedback," Working Papers e06-11, Virginia Polytechnic Institute and State University, Department of Economics.

    More about this item

    JEL classification:

    • C78 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Bargaining Theory; Matching Theory
    • 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

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