Market Tightness Research Articles

Labor Market of Regular Workers in Japan: A Perspective from Job Advertisement Data

We present an analysis of wages and labor market tightness for regular workers (full-time permanent workers) in Japan, utilizing a novel dataset of online job advertisements spanning the period from 2015 to 2022. Despite the importance of online job advertisements for the labor market, little has been studied for the case of Japan. Our study documents labor market conditions reflected in online job advertisement data and investigates how posted wages are related to the labor market tightness, and how they affect actual wages of existing workers. The results uncover several aspects of the labor market which are not captured by official statistics. First, we find that posted wages for regular workers increased at a pace faster than wages for existing regular workers in the sample period, with some heterogeneity across industries and skill requirements. Second, we find that the estimated job-filling rate observed from the dataset declined in recent years, which suggests difficulties that firms faced in hiring workers, and that this was associated with an increase in posted wages. Third, we find that an increase in posted wages positively affects the wages of existing regular workers after some time lag. Our empirical findings suggest that spillovers are driven by underlying mechanisms such as retention of existing workers, and fairness norms to maintain a balance in wages between newly hired workers and existing workers.

Investigating the market tightness of selected stocks in the Johannesburg Stock Exchange

The market tightness of equity securities is an integral component of financial market because it supports smooth trading and absorb market shocks. However, the contention has always been to effectively determine the level of tightness in equity securities with the application of proper methodology in order to make informed decisions. Therefore, aim of this study was to examine the level of market tightness in selected stocks in the Johannesburg stock exchange. Using a variance ratio model, the findings of this study indicates that most securities trading on the exchange lack market tightness. This was evident in the difference between the one, two and three months variances that were not equal to 1 . Therefore, a specialist system should be introduced in order to facilitate the execution of trades without significantly moving the prices of equity securities. This study improves the frontier of knowledge regarding liquidity management, by empirically investigating the market tightness of equity securities.

Wage Growth, Labor Market Tightness, and Inflation: A Service Sector Analysis

This Economic Commentary explores the connections among labor market tightness, wage inflation, and price inflation at the service sector level. Across most service sectors, sector-specific labor market tightness and nominal wage growth have been above prepandemic averages since 2022. The data suggest that a stronger positive relationship between labor market tightness and wage growth has emerged in the aftermath of the pandemic. The relationship between sector-specific wage growth and inflation is more varied. In the education and health services sector, higher wage growth is associated with higher inflation after about one year; in the leisure and hospitality services sector, the positive relationship is contemporaneous. I do not find a significant relationship between wage growth and inflation in the other service sectors, such as transportation or financial and business services.

Labour market tightness in the post-COVID-19 era

Since 2020, the labour market in advanced economies has shown resilience against successive supply-side shocks. High job vacancy rates and historically low unemployment, despite a recent weakening of economic growth, imply a lower sensitivity of the labour market to changes in the business cycle, underscoring the need to re-evaluate labour market tightness, as it could increase the risks of wage-price spirals and more restrictive monetary policy. Ιn the present paper, we analyse the degree of labour market tightness and its implications for wages, inflation and monetary policy in two large open economies, the US and the euro area, and in a small open economy, Greece, that has undergone substantial labour market reforms, to explore whether post-pandemic labour market developments have common or idiosyncratic features. We find that policy support measures to address the pandemic and the energy crisis have decoupled unemployment from cyclical fluctuations, with the gap narrowing in 2023. Labour market tightness in the post-pandemic era has mainly been driven by a robust increase in labour demand, while labour supply has reverted to or exceeded pre-pandemic levels in the US, the euro area and Greece. Real compensation per employee lags labour productivity levels in all three economies, whereas it remains below its pre-pandemic level in the euro area and Greece. This suggests that the economies in question could tolerate some further catch-up in real wages in the short term without experiencing inflation.

Wage–price spirals: what is the historical evidence?

AbstractHow common are wage–price spirals, and what has happened in their aftermath? We construct a new historical database of wage–price spirals—identified as episodes with consumer price inflation and average nominal wage growth rising jointly for at least a year—going back to the 1960s for a large sample of advanced economies. We find that only about a quarter of such episodes were followed by sustained accelerations in wages and prices. Instead, nominal wage growth and inflation tended to stabilize at a higher level on average, and then gradually revert, with real wage growth broadly unchanged. A decomposition of average wage dynamics during wage–price spiral episodes using a wage Phillips curve suggests that nominal wage growth normally stabilizes at levels consistent with observed inflation and labour market tightness. After historical episodes exhibiting rising inflation, falling real wages, and tightening labour markets—similar to what was observed in the early post‐COVID‐19 recovery in 2021—inflation tended to decline and nominal wage growth to rise, allowing real wages to gradually catch up. Our findings suggest that an acceleration of nominal wages against a backdrop of rising inflation does not necessarily signal that a persistent wage–price spiral dynamic is taking hold.

Labor market pathways to job quality mobility in the service sector: Evidence from the “Great Resignation”

Since the mid-1970s, there has been a sharp rise in the prevalence of “bad jobs” in the U.S. labor market, characterized by stagnant wages, unstable work schedules, and limited fringe benefits. Scholarly, policy, and public debate persists, however, about whether these jobs can serve as steppingstones to intra-generational job quality mobility or are instead “poverty traps.” While scholarship increasingly recognizes the multi-dimensional nature of job quality, prior research on intra-generational job mobility overwhelmingly estimates only wage mobility and generally focuses on estimating the degree of mobility, to the exclusion of the contexts and mechanisms that foster such mobility. We draw on new panel data collected from 8600 hourly service sector workers between 2017 and 2022 to estimate short-run mobility into good jobs, defined as paying at least $15/hour, having a stable work schedule, and offering paid sick leave, employer-sponsored health insurance, and retirement benefits. Overall, we find that mobility into such “good jobs” is low. However, we show that the rate of transition into “good jobs” is strongly conditioned by local labor market conditions: during the “Great Resignation” and in low state-month unemployment periods, nearly twice the share of workers transitioned to “good jobs” as in less favorable contexts, particularly workers who changed sector as opposed to staying at the same firm or taking new jobs in the service sector. Notably, during periods of labor market tightness, workers who stayed at the same employer had similar rates of mobility into “good jobs” as those who changed employers within the sector.

Labour Market Tightness and Matching Efficiency in Different Labour Market Segments – Do Differences in Education Matter?

Abstract This paper analyses the existing educational structures of selected EU member countries and their alignment with the labour market (LM) needs. This study aims to identify potential structural mismatches between the skills taught in schools and universities and the skills and knowledge required in the workplace. To evaluate this educational mismatch, the paper explores the matching needs of employers and unemployed job seekers by using disaggregated national employment office data. The paper examines the selected group of EU countries (AT, HR, EE, SI, ES) from 2010 to 2022, using the Beveridge curves and estimating LM tightness and matching efficiency for different education groups. The results show that differences in education levels result in relatively small deviations from aggregate trends in the LM. Aggregate LM trends strongly impact all education groups in the labour market.

Prediction algorithms in matching platforms

We follow the future trajectory of more targeted wage formation in labor matching platforms, such as freelancing, crowd-sourcing, home-delivery, and ride-hailing, where local job search is coordinated by improving prediction algorithms. A labor matching platform is modelled as a directed search and matching market. We observe that targeted wage setting promotes efficient matching and longer employment spells. However, because a higher employment rate accentuates any disparities between available workers and vacancies, the effects of targeted wage setting on firm competition depend on prevailing market tightness. The impact of targeted wage formation on workers is positive when the vacancy-to-worker ratio is intermediate but turns negative at both extremes. Our results suggest that targeted wage setting may benefit occasional workers while potentially posing drawbacks for full-time platform workers.

The unemployment–inflation trade-off revisited: The Phillips curve in COVID times

Using a New Keynesian Phillips curve, we document the rapid and persistent increase in the natural rate of unemployment, ut∗, in the aftermath of the pandemic and characterize its implications for inflation dynamics. While the bulk of the inflation surge is attributed to temporary supply factors, we also find an important role for current and expected negative unemployment gaps. Through the lens of the model, the 2022–2023 disinflation was driven by the expectation that the unemployment gap will close through a progressive decline in ut∗ and a rise in the unemployment rate. This implies that convergence to long-run price stability depends, critically, on expectations about labor market tightness. Using a variety of cross-sectional data sources we provide corroborating evidence of unusually tight labor market conditions, consistent with our estimated rise in ut∗.

A Theory of the Term Structure of Interest Rates under Limited Household Risk Sharing

Abstract We present a theory in which the interaction between limited sharing of idiosyncratic labor income risk and labor adjustment costs (that endogenously arise through search frictions) determines interest rate dynamics. In the general equilibrium, the interaction of these two ingredients relates bond risk premiums, cross-sectional skewness of income growth, and labor market tightness. Our model rationalizes an upward-sloping average yield curve and predicts a negative relation between labor market tightness and bond risk premiums. We provide evidence for our theory’s mechanism and predictions.

The Shortage of Professionals/Skilled Workers: Its Impact on the Inflation Rate in the Eurozone

The shortness of professionals and/or skilled workers is a widespread phenomenon in industrialized countries, and so it is in the Eurozone. The vacancy ratio, which is defined and explained in its three (respectively four) alternative definitions, may serve both as a measure of labour market tightness and as a proxy for the shortness of professionals and/or skilled workers. We derive, in two variants, a theoretical model which is based on the Phillips and the Beveridge curve. A combination of these two concepts yields a so-called “modified output gap” suitable for explaining the inflation rate of Eurozone member countries, driven, among other things, by the vacancy ratio. This model is successfully tested for about 70% of the Eurozone member countries (2006-2021). We conclude our exposition with suggestions for economic policy on how to sensibly reduce the vacancy ratio, a summary of findings, and a scope for future research.

Optimal unemployment insurance with behavioral agents

Abstract This paper studies how behavioral biases affect the optimal unemployment insurance. I revisit the optimal UI of Landais et al. (2018) and show how the optimal UI formula is modified and leads to novel economic insights. The optimal UI replacement rate is the conventional Baily-Chetty replacement rate, which solves the trade-off between liquidity and job-search incentives, plus a market tightness correction term which shows how welfare is affected by UI through tightness, and plus a behavioral bias correction term, which shows how welfare is affected by UI through job search effort.

Frictions and the diffusion of automation

AbstractThis paper studies the implications of business cycle frictions for the diffusion of permanent changes in automation. Incorporating task‐based production in different versions of the New Keynesian model reveals considerable short‐run implications. Price‐distorting nominal rigidities amplify the labor displacement and attenuate the productivity and welfare gains of automation during the transition to the new equilibrium. They exacerbate the falls in the labor income share, the job finding probability, the value of long‐term contracts, and labor market tightness. The inflation response follows a J‐curve. Frictions in capital supply and wage rigidities amplify the labor displacement and attenuate the productivity gains too.

Understanding ethnic hiring discrimination: A contextual analysis of experimental evidence

Previous research has demonstrated that context matters in understanding unequal treatment in hiring—for example, some studies have illustrated that hiring discrimination is low in large organisations or high in public-facing occupations. Following a review of the recent literature on ethnic hiring discrimination, we identified fourteen plausible moderators (i.e. discrimination correlates) from which we derived an equal number of hypotheses related to taste-based and statistical discrimination theories. We empirically tested these hypotheses through a moderation analysis of data from a correspondence experiment supplemented with occupation, organisation, and sector characteristics. Our empirical approach allowed us to simultaneously evaluate and control the interaction effects of multiple contextual factors with ethnic hiring discrimination. Overall, we find that minority (non-Flemish) candidates receive significantly fewer positive responses to their job applications than majority (Flemish) candidates. In particular, non-Flemish candidates experience significantly less discrimination when applying to not-for-profit organisations or organisations with a large workforce. We also find partial empirical support for the hypotheses that hiring discrimination is high in occupations requiring much interaction between colleagues and in occupations where labour market tightness is low. Future research avenues include evaluating the rationale behind the discrimination correlates mentioned above and testing the replicability of this study's findings across different institutional contexts, labour markets, and grounds for discrimination.

Optimal monetary policy in developing countries: The role of informality

In this paper, I analyze optimal monetary policy in developing countries whose labor markets are characterized by the presence of a large informal sector. I develop a closed economy model with nominal price and wage rigidities, search and matching frictions, and a dual labor market: a formal one characterized by matching frictions and nominal wage rigidities, and an informal one where wages are fully flexible. Under this framework, a trade-off between price and wage inflation emerges. I find that informality increases the response of price and wage inflation to aggregate productivity shocks. As a result, the presence of an informal sector increases the inefficient fluctuations of labor market variables, such as unemployment, labor market tightness, and formal hiring rate. I find that optimal policy with informality features significant deviations from price stability in response to aggregate productivity shocks.

High Discounts and Low Fundamental Surplus: An Equivalence Result for Unemployment Fluctuations

We establish an observational equivalence between unemployment fluctuations of the Diamond-Mortensen-Pissarides search economy augmented with time varying risk premia and an otherwise identical economy without risk premia but with a time varying value of leisure. This equivalence holds for general risk premia processes and allows us to view the effects of different models of risk premia as operating through a single channel—one that alters the value of leisure. We derive simple expressions for semielasticities of labor market tightness with respect to productivity and risk premium shocks. We show wages can be used to detect misspecification in the discount rate process used in hiring decisions. This paper was accepted by Lukas Schmid, finance. Supplemental Material: The online appendix is available at https://doi.org/10.1287/mnsc.2022.03712 .

Optimal growth with labor market frictions

AbstractIn this paper, I build a capital accumulation model in which labor has to be alternatively employed in the production of goods or in the recruitment of workers. Within this setting, I show that (i) the intensive measure of capital may converge towards its stationary value in a non‐monotonic manner, (ii) Pareto‐optimal allocations can also be achieved in a decentralized environment in which the wage is indexed to labor market tightness, and (iii) the consistency of the wage that implements efficient allocations with the competitiveness of the market for goods relies on vanishing values of the discount rate.

Navigating Regional Barriers to Job Mobility: The Role of Opportunity Structures in Individual Job-to-Job Transitions

Job-to-job transitions are associated with career progression and wage gains. Thus, regional differences in job mobility potentially contribute to and reinforce regional and social inequalities. This study aims to close the research gap in the understanding of the regional contexts in which individual job mobility occurs. Using the theoretical concept of regional opportunity structures, three key aspects of region-related job changes are investigated: regional determinants of (1) general job mobility; (2) job mobility with wage gains; and (3) simultaneous job and residential mobility. This study is based on individual data from the German Socio-Economic Panel study, enriched with regional indicators. The results show that job changes are negatively associated with labour market tightness, indicating that workers are less likely to change jobs in regions with a high ratio of job vacancies to unemployed workers. Fewer job-to-job transitions in tighter labour markets suggests that regional factors such as job availability and security play an important role in shaping job mobility, and that policies aimed at promoting job transitions may need to consider the specificities of local labour markets. The effects of other indicators of economic opportunities remain insignificant, and there are no clear effects of other aspects of regional opportunity structures.

How important are minimum wage increases in increasing the wages of minimum wage workers?

AbstractPopular discussion presumes minimum wage increases primarily drive wage gains for minimum wage workers. We investigate this presumption using the Current Population Survey to assess the fraction of minimum wage workers receiving raises after 12 months. This fraction is moderately higher following state minimum wage increases, and positively correlated with several measures of labor market tightness. Finally, wage gains frequently follow industry and/or occupation switches, highlighting the importance of career progression for earnings growth among entry‐level workers. Career progression and increases in labor demand rather than minimum wage increases appear to drive most wage gains for minimum wage workers.

Money demand by firms, labor market frictions, and optimal long-run inflation

Abstract Optimal monetary policy, under flexible and sticky prices, and sticky nominal wages are studied in the canonical matching model of the labor market with a working capital channel. A money demand by firms is motivated by the fact that a significant amount of M1 is held by firms. As a result of the working capital, the Ramsey-optimal monetary policy calls for inflation when employment is above the socially efficient level and for deflation when it is below that level. This result holds under flexible wages as well as nominal wage rigidities. In other words, to improve labor market efficiency, deflation is necessary to “grease the wheels of the labor market.” Although there is no relationship between optimal monetary policy and the market tightness under flexible prices, a long-run and mainly negative relationship between the optimal inflation rate and the equilibrium tightness emerges under sticky prices.