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A New Indicator of Labor Market Tightness for Predicting Wage Inflation

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Abstract

A key question in economic policy is how labor market tightness affects wage inflation and ultimately prices. In this post, we highlight the importance of two measures of tightness in determining wage growth: the quits rate, and vacancies per searcher (V/S)—where searchers include both employed and non-employed job seekers. Amongst a broad set of indicators, we find that these two measures are independently the most strongly correlated with wage inflation. We construct a new index, called the Heise-Pearce-Weber (HPW) Tightness Index, which is a composite of quits and vacancies per searcher, and show that it performs best of all in explaining U.S. wage growth, including over the COVID pandemic and recovery.

Suggested Citation

  • Sebastian Heise & Jeremy Pearce & Jacob P. Weber, 2024. "A New Indicator of Labor Market Tightness for Predicting Wage Inflation," Liberty Street Economics 20241009, Federal Reserve Bank of New York.
    • Handle: RePEc:fip:fednls:98941
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    More about this item

    Keywords

    wages; labor market; Phillips curve; inflation;
    All these keywords.

    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

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