Job search and matching
Research Summary

Better Job Matching is Better for Inflation

Joe Peck November 07, 2023
Source: NBER Working Paper Title: The Job Ladder: Inflation vs. Reallocation Author(s): Giuseppe Moscarini and Fabien Postel-Vinay Original Publication Date: July 2023 Read Full Research Article

When someone is offered a new job by an employer, two things can happen: they accept or reject it. When an employee accepts an offer and switches to a new job, they move up the job ladder to a more suitable role. If an employee rejects the offer and chooses to stay in their current job, they can often use the job offer to negotiate for a higher salary with their current employer. This is beneficial to the employee, but if they stay in the same position, it does not advance them up the job ladder.

Traditional analysis of the strength of the labor market focuses on the unemployment rate as a central indicator, relying on the relationship between employment allocation and inflation (going back to the Philips curve of the 1950s) as a way to understand how well the economy is performing.

In this study, Giuseppe Moscarini and Fabien Postel-Vinay push this debate in a new direction. The authors create a new metric for studying the population of workers who, while employed, are potentially mismatched and not in their most suitable job. They find that workers’ decisions to switch to or stay in a job can impact inflation.

Key findings

  • A new measure of employment misallocation, the “acceptance rate,” gives the ratio between the transition probabilities of workers moving between employers and workers moving from unemployment to employment. When this ratio is high, more workers are moving between jobs relative to the jobs available overall. The authors propose this as a solid indicator both of the proportion of mismatched jobs in the labor market and, per the argument in their paper, inflation.
  • When an employee rejects a new job and their existing employer matches the alternate job offer, it puts upward pressure on inflation. The company has to pay the employee more for the same job, and the firm’s costs rise. Prices will rise in due course, though with a delay as a result of relative price rigidity.
    • This is most likely to occur during good economic times. After periods of economic expansion, workers have been moving up the job ladder for a while and will be less likely to switch to new jobs. It is at this point that the inflationary pressure appears.
  • As more people accept outside jobs (and fewer people stay in their old ones), inflation is less likely. Earnings increase as a result of increased productivity in better-matched jobs.
    • This is most likely to occur during periods following economic recessions, when individuals are more likely to be crowded at the bottom of the job ladder. Employees are more likely to search for and match to new jobs during these times rather than staying in their old ones.

Policy and practice implications

WorkRise recommends the following implications for policy and practice:

Implications for policymakers:

  • Analyze economic trends beyond the unemployment rate: By emphasizing the importance of labor market flows and deemphasizing the unemployment rate (the central measurement of labor market health), the authors demonstrate a better way for policymakers to assess labor market slack (when there are many more workers looking for jobs than those available) and inflationary pressure.
  • To reduce inflationary pressure, support policies that facilitate job matching: Employment allocation up the job ladder is greater when workers take new and better-matched jobs. Noncompete agreements (NCAs), for example, limit workers’ ability to switch to better jobs. Policymakers interested in lower inflation could support banning and/or weakening the enforceability of NCAs.
  • Ensure better job matching locally: Given that jobs and industries can be concentrated in certain regions, mayors and other local government officials could consider the location in workers’ search and matching processes. Place-based employment policies could foster better job matching across different regions.

Implications for researchers:

  • Reexamine the importance of other labor market measures: Unlike in the more traditional framework that analyzes the relationship between overall employment and inflation, this study has implications for the quality of employment. Search and matching work of this kind has generally focused on traditional measures like the unemployment rate and the labor share of income. But given that job market slack can be a significant factor in the labor market even when unemployment is low, it is worth examining whether a worker’s productivity or output can increase simply by moving them to a better-suited job, perhaps in a different industry or in a place closer to their home.
  • Consider new measurements of labor market slack: Using the “acceptance rate” (the probability of an employee switching from one employer to another relative to general job availability), the authors develop a new way of analyzing the rate of mismatched employees in the labor market. This has implications for not just the suitability of jobs but also wider macroeconomic factors—such as inflation, as this paper shows. More research could build on this framework to better understand search and matching probabilities.

With this work, Moscarini and Postel-Vinay introduce a new concept in the literature of job search and matching. They invite policymakers to consider the implications of higher job acceptance on the economy at large and on inflation, and to make decisions accordingly. For researchers, too, this approach signals a new avenue through which a better understanding of job allocation in the economy might be reached.

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