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October 2024 Revised February 2025
JEL classification: E31, E52
Authors: Justin Bloesch, Seung Joo Lee, and Jacob P. Weber
We argue that if firms set wages and workers search on the job, then pass-through from prices to wages is weak, limiting wage-price spirals. We derive a tractable general equilibrium model with firm wage setting and on-the-job search. Our wage Phillips curve matches U.S. empirical evidence that quits predict nominal wage growth. To isolate pass-through mechanisms, we theoretically examine a shock that raises consumer prices but not the marginal product of labor. In response, real wages fall at both workers’ current job and their outside options, limiting firms’ incentive to raise wages and preventing propagation into further price increases.
This author declares that he has no relevant or material financial interests that relate to the research described in this paper. Prior to circulation, this paper was reviewed in accordance with the Federal Reserve Bank of New York review policy, available at https://www.newyorkfed.org/research/staff_reports/index.html.
Seung Joo Lee
This author declares that he has no relevant or material financial interests that relate to the research described in this paper. Prior to circulation, this paper was reviewed in accordance with the Federal Reserve Bank of New York review policy, available at https://www.newyorkfed.org/research/staff_reports/index.html.
Jacob Weber
This author declares that he has no relevant or material financial interests that relate to the research described in this paper. Prior to circulation, this paper was reviewed in accordance with the Federal Reserve Bank of New York review policy, available at https://www.newyorkfed.org/research/staff_reports/index.html.
Bloesch, Justin, Seung Joo Lee, and Jacob P. Weber 2024. “Firm Wage Setting and On-the-Job Search Limit Wage-Price Spirals.” Federal Reserve Bank of New York Staff Reports, no. 1126, October. https://doi.org/10.59576/sr.1126
