Job Search, Wages, and Inflation
Paper joint with Jane M. Ryngaert
Abstract: How do inflation expectations and inflation affect the job search behavior of workers, given that wages are typically set in nominal terms? Using pre-COVID data from the Survey of Consumer Expectations, we show that employed workers who expect higher inflation are more likely to search for jobs and are subsequently more likely to have a job-to-job transition over the short term. This behavior is consistent with the idea that people look for new jobs with higher real earnings, anticipating that real earnings at their current job will fall with inflation. We validate this hypothesis using new survey data collected via the Real Time Population Survey that asks individuals how their (i) current nominal earnings and (ii) search behavior would respond under various inflation scenarios. We then develop a model which can replicate these patterns, and use the model to study the partial equilibrium passthrough of shocks to inflation and inflation expectations to wages. We demonstrate that even short run increases in inflation expectations can affect job-to-job transitions via search on-the-job, and that the effects are larger at the lower end of the wage distribution. Together, the findings suggest that inflation dynamics may have played a role in generating the observed post-Covid wage compression.