Job Ladder, Wages, and Prices

The Phillips curve, which links inflation and unemployment, has in its various forms guided monetary policy for more than fifty years. However, recent U.S. experience with low levels of unemployment and inflation has led many economists to question whether the Phillips curve is still relevant, see Gordon (2015) and Blanchard (2016). Reacting to this, we reconsider, and explore empirically, mechanisms underlying the interaction between labor market slack, wage setting and producer prices. Specifically, this paper builds on an idea, also put forth in Faberman and Justiniano (2015) and Moscarini and Postel-Vinay (2016, 2017), that aggregate wage growth springs from heightened competition for workers and the latter is best summarized by job-to-job transitions---moves from one job to another one without an intervening spell of unemployment. We test this hypothesis using state-level variation based on data from the Quarterly Workforce Indicators (QWI), which provide a set of economic indicators including earnings of new hires by detailed firm and worker characteristics. We find large and significant effects on earnings growth from job-to-job transitions in the first part of our analysis. While a faster pace of job-to-job transitions imply faster wage growth, it does not necessarily lead to faster price growth. As formalized by Moscarini and Postel-Vinay (2017), job switches that improve match quality might lead to earnings growth without an increase in the unit cost of labor. We use producer prices from the BLS and wages from the QWI for the last three decades and show a significant decline in the pass-through from wages to prices in manufacturing over that time period. At the same time, pass-through in non-manufacturing has been flat for the period since the early 2000s. We show using data on multifactor productivity from the BLS that the lower price-wage response is not driven by productivity improvements.