Publication

This paper assesses the empirical relevance for inflation dynamics of accounting for the presence of search frictions in the labor market. The authors argue that, allowing for search frictions in the labor market, real marginal cost should also incorporate the cost of generating and maintaining long-term employment relationships, along with conventional measures, such as real unit labor costs. In order to construct a synthetic measure of real marginal costs, they use newly available labor market data on worker finding and separation rates that reflect firing and hiring costs to the firm. They then estimate a New Keynesian Phillips curve using structural econometric techniques.