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The Inflation of Resetting Workers

Rui Sun

Abstract

The standard wage Phillips curve aggregates away from which workers reset wages when. I show this aggregation omits a first-order term: the covariance between workers' cost-push exposure and their reset frequency. I introduce two sufficient statistics and embed them in a multi-country HANK model calibrated to six euro-area economies. The omitted term generates 7 percent more cumulative core inflation in the baseline and 10--26 percent more when monetary policy is delayed. Two economies with identical openness can differ by 6.6 percentage-point-quarters solely from within-country composition. Targeted essentials subsidies reduce welfare loss by 32 percent relative to aggressive tightening. Out of sample, the model correctly predicts the persistence ranking across the UK, the US, and Japan.

The Inflation of Resetting Workers

Abstract

The standard wage Phillips curve aggregates away from which workers reset wages when. I show this aggregation omits a first-order term: the covariance between workers' cost-push exposure and their reset frequency. I introduce two sufficient statistics and embed them in a multi-country HANK model calibrated to six euro-area economies. The omitted term generates 7 percent more cumulative core inflation in the baseline and 10--26 percent more when monetary policy is delayed. Two economies with identical openness can differ by 6.6 percentage-point-quarters solely from within-country composition. Targeted essentials subsidies reduce welfare loss by 32 percent relative to aggressive tightening. Out of sample, the model correctly predicts the persistence ranking across the UK, the US, and Japan.

Paper Structure

This paper contains 77 sections, 6 theorems, 70 equations, 8 figures, 19 tables.

Table of Contents

  1. Introduction
  2. Motivating Evidence
  3. Cross-country dispersion in core inflation persistence
  4. Correlation with within-country labor market composition
  5. The standard model underpredicts dispersion
  6. Model
  7. Overview and timing
  8. Households
  9. Wage setting
  10. Inflation expectations
  11. Firms
  12. Aggregation and core inflation
  13. Aggregate demand
  14. Policy
  15. Equilibrium
  16. ...and 62 more sections

Key Result

Proposition 1

(Heterogeneous Wage Phillips Curve.) Aggregate wage inflation in country $c$ satisfies where $\tilde{\kappa}_c$ is the aggregate Phillips curve slope, defined as and $\Omega_{c,t}$ is the reset-heterogeneity wedge (Definition def:wedge). The fourth term, $\bar{\theta}_c\,\Omega_{c,t}$, is absent from the standard New Keynesian wage Phillips curve. It is identically zero if and only if at least o

Figures (8)

  • Figure 1: Core HICP inflation for selected euro-area countries.
  • Figure 2: RWEI versus cumulative core inflation.
  • Figure 3: Transmission mechanism.
  • Figure 4: Numerical illustration of the wedge.
  • Figure 5: Shock-dependent aggregation error.
  • ...and 3 more figures

Theorems & Definitions (16)

  • Definition 1
  • Definition 2
  • Definition 3
  • Definition 4
  • Proposition 1
  • Proposition 2
  • Corollary 1
  • Proposition 3
  • Proposition 4
  • Proposition 5
  • ...and 6 more