Sticky Wages on the Layoff Margin
Steven J. Davis, Pawel M. Krolikowski
We design and field an innovative survey of unemployment insurance (UI) recipients that yields new insights about wage stickiness on the layoff margin. Most UI recipients express a willingness to accept wage cuts of 5 percent to 10 percent to save their jobs, and one-third would accept a 25 percent cut. Yet worker—employer discussions about cuts in pay, benefits, or hours in lieu of layoffs are exceedingly rare. When asked why employers don’t raise the possibility of job-preserving pay cuts, four in 10 UI recipients don’t know. Sixteen percent say cuts would undermine morale or lead the best workers to quit, and 39 percent don’t think wage cuts would save their jobs. For those who lost union jobs, 45 percent say contractual restrictions prevent wage cuts. Among those on permanent layoff who reject our hypothetical pay cuts, half say they have better outside options, and 38 percent regard the proposed pay cut as insulting. Our results suggest that wage cuts acceptable to both worker and employer could potentially prevent a quarter of the layoffs in our sample. We draw on our findings and other evidence to assess theories of wage stickiness and its role in layoffs.
Post-COVID Inflation Dynamics: Higher for Longer
Randal J. Verbrugge, Saeed Zaman
We implement a novel nonlinear structural model featuring an empirically-successful frequency-dependent and asymmetric Phillips curve; unemployment frequency components interact with three components of core PCE—core goods, housing, and core services ex-housing—and a variable capturing supply shocks. Forecast tests verify model’s accuracy in its unemployment-inflation tradeoffs, crucial for monetary policy. Using this model, we assess the plausibility of the December 2022 Summary of Economic Projections (SEP). By 2025:Q4, the SEP projects 2.1 percent inflation; however, conditional on the SEP unemployment path, we project inflation of 2.9 percent. A fairly deep recession delivers the SEP inflation path, but a simple welfare analysis rejects this outcome.
Estimates of Cost-Price Passthrough from Business Survey Data
Keshav Dogra, Sebastian Heise, Edward S. Knotek II, Brent Meyer, Robert W. Rich, Raphael S. Schoenle, Giorgio Topa, Wilbert van der Klaauw, Wändi Bruine de Bruin
We examine businesses' price-setting practices via open-ended interviews and in a quantitative survey module with business contacts from the Federal Reserve Banks of Atlanta, Cleveland, and New York in December 2022 and January 2023. Businesses indicated that their prices were strongly influenced by demand, a desire to maintain steady profit margins, and wages and labor costs. Survey respondents expected reduced growth in costs and prices of about 5 percent on average over the next year. Backward-looking, forward-looking, and hypothetical scenarios reveal average cost-price passthrough of around 60 percent, with meaningful heterogeneity across firms.
Improving Inflation Forecasts Using Robust Measures
Randal J. Verbrugge, Saeed Zaman
Theory and extant empirical evidence suggest that the cross-sectional asymmetry across disaggregated price indexes might be useful in forecasting aggregate inflation. Trimmed-mean inflation estimators have been shown to be useful devices for forecasting headline PCE inflation. But is this because they signal the underlying trend or because they implicitly signal asymmetry in the underlying distribution? We address this question by augmenting a "hard" to beat benchmark headline PCE inflation forecasting model with robust trimmed-mean inflation measures and robust measures of the cross-sectional skewness, both computed using the 180+ components of the PCE price index. Our results indicate significant gains in the point and density accuracy of PCE inflation forecasts over medium- and longer-term horizons, up through and including the COVID-19 pandemic. Improvements in accuracy stem mainly from the trend information implicit in trimmed-mean estimators, but skewness information is also useful. An examination of goods and services PCE inflation provides similar inference.
