Job Polarisation, Labour Market Fluidity and the Flattening of the Phillips Curve

Abstract

Abstract This paper shows that job polarisation—i.e., the disappearance of routine jobs—is changing the characteristics of the labour market. This has structural implications for the relationship between inflation and unemployment, the price Phillips curve. Using data from the European Monetary Union and exploiting the fact that job polarisation accelerates during recessions, we obtain two empirical results. First, countries experiencing a bigger shift in the occupational structure during a downturn exhibit a flatter Phillips curve afterwards. Second, the occupational shifts experienced during the Great Recession and the Sovereign Debt Crisis explain more than a fourth of the flattening of the curve in the 2002–18 period. Then, using a New Keynesian model with unemployment and search and matching frictions, we highlight a channel through which labour market characteristics operate on the slope of the Phillips curve. Increasing labour market fluidity—i.e., a higher separation and hiring rate—decreases the slope of the Phillips curve. Using micro-data, we find that in the European Monetary Union non-routine jobs are more fluid. We conclude that job polarisation flattened the Phillips curve.