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Slack and prices during Covid-19: Accounting for labor market participation

Author

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  • D’Amuri, Francesco
  • De Philippis, Marta
  • Guglielminetti, Elisa
  • Lo Bello, Salvatore

Abstract

Strong labor force participation cyclicality during the Covid-19 pandemic has put further into question the capacity of standard Phillips Curve (PC) models to fully capture labor market cyclical conditions. In this paper, we jointly estimate natural unemployment and participation rates (i.e. compatible with constant inflation) through an augmented PC informed by structural labor market flows across employment, unemployment and inactivity. Focusing on Italy we find that, during the pandemic: (i) natural unemployment has remained unchanged, while natural participation has declined slightly, mostly due to a rise in retirement flows driven by a temporary reduction in pension eligibility rules; (ii) virtually all slack was accounted for by the participation margin, which added significant downward pressures to inflation dynamics.

Suggested Citation

  • D’Amuri, Francesco & De Philippis, Marta & Guglielminetti, Elisa & Lo Bello, Salvatore, 2022. "Slack and prices during Covid-19: Accounting for labor market participation," Labour Economics, Elsevier, vol. 75(C).
    • Handle: RePEc:eee:labeco:v:75:y:2022:i:c:s0927537122000227
    DOI: 10.1016/j.labeco.2022.102129
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