IMF Working Papers

Inflation and Labor Markets: A Bottom-Up View

By Sophia Chen, Deniz O Igan, Prachi Mishra

October 11, 2024

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Format: Chicago

Sophia Chen, Deniz O Igan, and Prachi Mishra. "Inflation and Labor Markets: A Bottom-Up View", IMF Working Papers 2024, 220 (2024), accessed October 11, 2024, https://doi.org/10.5089/9798400291807.001

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Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Summary

U.S. inflation surged in 2021-22 and has since declined, driven largely by a sharp drop in goods inflation, though services inflation remains elevated. This paper zooms into services inflation, using proprietary microdata on wages to examine its relationship with service sector wage growth at the Metropolitan Statistical Area (MSA) level. We estimate the wage-price pass-through with a local projection instrumental variable model that exploits variation in labor market tightness across MSAs. Our findings reveal a positive and significant relationship between wages and price growth, with a lag. This suggests that the effects of tight labor markets are persistent and may influence the pace of progression toward the inflation target.

Keywords: Inflation, Labor Market Conditions, Wages

Publication Details