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Staff Reports

Wage Growth and Labor Market Tightness

Number 1128
October 2024

JEL classification: E3, J6

Authors: Sebastian Heise, Jeremy Pearce, and Jacob P. Weber

Good measures of labor market tightness are essential to predict wage inflation and to calibrate monetary policy. This paper highlights the importance of two measures of labor market tightness in determining wage growth: the quits rate, and vacancies per effective searcher (V/ES)—where searchers include both employed and non-employed job seekers. Amongst a broad set of indicators of labor market tightness, we find that these two measures are independently the most strongly correlated with wage inflation and also predict wage growth well in out-of-sample forecasting exercises. Conversely, transitory shocks to productivity have little impact on wage growth. Finally, we find little evidence of a nonlinearity in the relationship between wage growth and labor market tightness. These results are generally consistent with the predictions of a New Keynesian DSGE model where firms have the power to set wages and workers search on the job (Bloesch, Lee, and Weber, 2024).

Full Article

Author Disclosure Statement(s)

Sebastian Heise
The 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.

Jeremy Pearce
I am writing to declare that I have no relevant material financial interests related to the paper "Wage Growth and Labor Market Tightness” co-authored with Sebastian Heise and Jake Weber.

Jacob P. 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.

Suggested Citation:
Heise, Sebastian, Jeremy Pearce, and Jacob P. Weber. 2024. “Wage Growth and Labor Market Tightness.” Federal Reserve Bank of New York Staff Reports, no. 1128, October. https://doi.org/10.59576/sr.1128

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