PARTICIPANTS
Erik Hurst, John Taylor, John Cochrane, Hoyt Bleakley, Michael Boskin, Chris Dauer, Steve Davis, Sami Diaf, Christopher Erceg, David Figlio, Peter Fisher, Jared Franz, Rick Geddes, Oliver Giesecke, Bob Hall, Jon Hartley, Robert Hetzel, Laurie Hodrick, Robert Hodrick, Nicholas Hope, Matthew Kahn, Morris Kleiner, Pete Klenow, Evan Koenig, Marianna Kudlyak, Jeff Lacker, Charles Leung, Jacob Light, Annamaria Lusardi, Ellen McGrattan, Axel Merk, Roger Mertz, Brendan Moore, Laura Nicolae, David Papell, Valerie Ramey, Josh Rauh, Paola Sapienza, Krishna Sharma, Sean Singleton, Richard Sousa, Juan Carlos Suarez Serra, Amit Seru, Tom Stephenson, Jack Tatom, Harald Uhlig, Wei Wei, Alexander Zentefis, Borui Niklas Zhu, Chiara Zisler
ISSUES DISCUSSED
Erik Hurst, Roman Family Distinguished Service Professor of Economics and John E. Jeuck Faculty Fellow at the University of Chicago Booth School, and Director of the Becker Friedman Institute, discussed “A Theory of How Workers Keep Up With Inflation,” a paper coauthored with Hassan Afrouzi (Columbia University), Andres Blanco (FRB Atlanta), and Andres Drenik (UT Austin).
John Taylor, the Mary and Robert Raymond Professor of Economics at Stanford University and the George P. Shultz Senior Fellow in Economics at the Hoover Institution, was the moderator.
PAPER SUMMARY
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.
To read the paper, click here
To read the slides, click here
WATCH THE SEMINAR
Topic: “A Theory of How Workers Keep Up With Inflation”
Start Time: February 19, 2025, 12:00 PM PT
