Inflation was the cause, not the result, of the ‘hot’ labor market, research shows

Back in 2022, when the labor market was so hot that Beyoncé even released a song about it, Americans were job hopping in large numbers, boosting their salary in the process.

Back in 2022, when the labor market was so hot that Beyoncé even released a song about it, Americans were job hopping in large numbers, boosting their salary in the process. The Great Resignation was in full swing. That fueled fears of a “wage-price spiral” — where wages and prices perpetually rise and feed off each other. But what appeared to be a hot job market was actually a symptom — not the cause — of the recent bout of inflation, according to new research that explored the consequences of unexpected rising prices on the labor market. Maybe it wasn’t even a hot labor market at all: Rising prices chomped away at people’s paychecks, forcing some workers to make drastic and costly decisions to switch jobs, according to the new working paper, “A Theory of How Workers Keep Up With Inflation.” That in turn drove vacancies higher, while layoffs and the overall unemployment rate remained historically low, giving the appearance of a tight labor market. “There are periods when there are shocks to labor demand that puts upward pressure on real wages, which will then have pass-throughs to output prices,” said co-author Erik Hurst, an economist and professor at the University of Chicago Booth School of Business. “In those periods when labor demand goes up, you will see other signs of a hot labor market, like real wages rising; you’ll see employment increasing; you’ll see the job-finding rate of the unemployed go up.”