SMU SOE Seminar Series (March 11, 2026): The Job Ladder: Inflation vs. Reallocation

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ABSTRACT

We introduce on-the-job search frictions in an otherwise standard monetary DSGE New-Keynesian model. Heterogeneity in productivity across jobs gives rise to a job ladder. Firms Bertrand-compete for employed workers according to the Sequential Auctions protocol of Postel-Vinay and Robin (2002). Outside offers to employed work-ers, when accepted, reallocate employment up the productivity ladder and expand aggregate supply; when declined, because matched by the current employer, they raise production costs and, due to nominal price rigidities, compress mark-ups, building infla-tionary pressure. When employment is concentrated at the bottom of the job ladder, typically after recessions, the reallocation effect prevails, aggregate supply expands, moderating marginal costs and inflation. As workers climb the job ladder, reducing slack in the employment pool, the inflation effect takes over. The model generates endogenous cyclical movements in the Neoclassical Labor wedge and in the New Key-nesian wage mark-up. The economy takes time to absorb cyclical misallocation and features propagation in the response of job creation, unemployment and inflation to aggregate shocks. Following unanticipated aggregate shocks to supply and demand for goods, transitional dynamics feature a phase when inflation comoves negatively with the ratio between job-finding probabilities from job-to-job and from unemployment, a measure of the “Acceptance rate” of job offers to employed workers, independently of the unemployment rate. We provide empirical evidence that a high Acceptance rate mutes the impact of a demand-driven change in the unemployment rate on real wages.