The Unassuming Economist

Source: VoxEU CEPR

Abstract: Since the beginning of the pandemic, labour market indicators have been sending different signals about the degree of slack in the US labour market. This column uses time-series and cross-section data to show that firm-side unemployment (figure underneath) – a measure that ties together the unemployment rate with the vacancy and quits rate – predicts wage inflation better than the unemployment rate or the employment ratio, and that firm-side unemployment currently experienced in the US corresponds to a degree of tightness previously associated with sub 2% unemployment. The findings suggest that labour markets in the US are extremely tight and will likely contribute to inflationary pressures for some time to come.

Figure: Actual unemployment rate versus firm-side estimated unemployment rate