For decades, the Phillips curve has been one of the bedrock principles guiding monetary policy. The curve suggests an inverse short-run relationship between unemployment and inflation: when unemployment is low, there is a scarcity of available workers, wages are pushed up and, as a result, prices rise.
Put differently, when the economy is booming, employers post lots of job openings, making it easier for an unemployed person to find work. This then grants employed workers stronger bargaining power for higher wages. Economists call this situation – where high demand for workers meets a low supply of available talent – a tight labour market. Upward pressure on wages passes through to higher prices.
Modern macroeconomic models elaborate on this idea, suggesting that in an expanding economy, it’s easy for the unemployed to find work, leading to declining unemployment and rising wages as employed workers gain bargaining power. This view has been widely adopted and largely focuses on the experiences of the unemployed. The underlying argument is that the value of unemployment is a worker’s ‘outside option’, which influences their bargaining power. Simply put, when jobs are plentiful, the prospect of becoming unemployed and having to find an alternative job isn’t that costly, which empowers workers to drive a hard bargain.
But our research (Moscarini and Postel-Vinay, 2025) challenges this long-held view, suggesting that when policy-makers are trying to predict inflation, unemployment alone might not be the best indicator of labour market slack (the difference between the amount of work offered by workers, and the actual volume of work requested by employers). We advocate a shift in focus away from just unemployment and towards the (mis)allocation of employment on a ‘job ladder’.
A new perspective: climbing the job ladder
In our work, we propose embracing an alternative, less crude view of the labour market, known as the job ladder theory. In this framework, workers don’t just move between unemployment and employment: rather, they are constantly looking for and moving between jobs while already employed, climbing up the rungs of productivity.
Crucially, in this job ladder view, a worker’s bargaining power doesn’t primarily come from the threat of unemployment, but from their ability to receive better outside job offers while currently employed.
When an employed worker receives an outside offer, two things can happen:
- They accept it: this moves the worker to a more productive job, effectively reallocating employment up the ladder. This process can actually increase the supply of labour and moderate overall production costs and inflation.
- They decline it because their current employer matches the offer: in this scenario, the worker stays, but their wages are pushed up. For the employer, this represents a cost-push shock, building inflationary pressure that eventually manifests as price inflation.
The inflationary effect becomes more likely after a long economic expansion. This is because workers have benefitted from a prolonged period of high labour demand, allowing them to move up the ladder and become harder to poach by another employer.
We also argue that competition for employed workers, not just the unemployed, is what truly transmits aggregate economic shocks to wages. This distinction is vital because these two types of competition point to different observable indicators of labour market slack that policy-makers should monitor.
The quality of employment: slack beyond quantity
Our job ladder framework includes a new way to think about labour market slack. Slack is typically measured by the quantity of unused labour resources, usually via the unemployment rate. But we suggest that unemployment is, at best, an incomplete measure of slack. This is because employed workers can be misallocated on the job ladder.
Employment misallocation means that workers are not in their most productive or ‘best fit’ jobs. A somewhat extreme example would be Bobby Walker, the character played by Ben Affleck in the 2010 film The Company Men: he is forced to take up a low-level construction job after losing his post as a successful sales executive when his company gets hit by a recession.
The more severe this kind of misallocation is, the easier it is to poach workers from competitors, and the stronger the incentive to create new, better jobs, regardless of the overall unemployment rate.
Conversely, when there is less misallocation (meaning that most workers are already in good, productive matches), most outside job offers are either rejected or matched by the current employer. This leads to larger wage gains (inflationary pressure), but fewer actual employment or productivity gains.
So, understanding the distribution of employment on the job ladder – a statistic that moves very slowly – is crucial for predicting job creation and, ultimately, the pace of inflation. Wages may not respond to falling unemployment for a considerable time until few workers are left at the bottom of the ladder, and competition for employed workers intensifies.
The acceptance rate: a new tool for policy-makers
Given that directly measuring occupational mismatch can be difficult, in our study we propose a novel, observable and easily measurable proxy for employment misallocation and labour market slack. We call this the acceptance rate (AC).
The AC is defined as the ratio of employer-to-employer (EE) transition probabilities to unemployment-to-employment (UE) transition probabilities. Let’s break down what this means:
- UE (unemployment-to-employment) transition probability: this measures the rate at which unemployed workers find jobs, reflecting the general availability of new job postings.
- EE (employer-to-employer) transition probability: this measures the rate at which employed workers switch directly from one employer to another without an intervening spell of unemployment.
How the AC works as an indicator
- Intuitively, unemployed workers accept nearly all job offers.
- So, the UE rate largely reflects how often jobseekers meet open vacancies. In other words, it is a good measure of the strength of labour demand.
- Since employed jobseekers face the same labour demand, hence the same meeting rate (adjusted for their search intensity), variations in the EE rate, relative to the UE rate, primarily reflect changes in the probability that employed workers accept outside offers.
- This acceptance probability, in turn, directly depends on how well-matched or misallocated they are in their current position on the job ladder.
A high AC (many employed workers switching jobs, relative to the rate at which unemployed workers find jobs) suggests that employed workers are more lenient in their standards, implying that they are mismatched and willing to entertain outside offers. This translates into a high level of labour supply, which stimulates job creation and relieves pressure on labour costs, acting as a deflationary force. In this scenario, there’s significant slack in the form of misallocated employed workers.
Conversely, a low AC implies that employed workers are well matched and less likely to switch positions, intensifying competition for those already employed and creating upward pressure on wages.
Examining the Great Resignation through a new lens
Moving away from theory and into the real world, the period in the immediate aftermath of the Covid-19 pandemic known as the Great Resignation saw monetary policy officials at the Federal Reserve (the US central bank) increasingly citing the quit rate (a proxy for job switching) as a predictor of wage growth and inflation. While job-to-job transitions can indeed lead to wage rises for the workers who experience them, they also serve as a powerful engine for productivity growth (as workers move to better matches) and labour cost moderation (due to increased effective labour supply).
Our theory suggests the advantages of focusing on the AC, rather than the raw job switching rate, as a predictor of inflation. Figures 1 and 2 illustrate the negative correlations that exist in US data between the AC and price inflation (Figure 1) or wage inflation (Figure 2).
Figure 1: Price inflation and the AC
Figure 2: Wage inflation and the AC
Source: Moscarini and Postel-Vinay, 2025
The AC is strongly countercyclical: intuitively, workers are more mismatched following a recession, which makes them more prone to accepting alternative job offers. Importantly, and unlike the unemployment rate, the AC accelerates downward as the expansion continues and workers gradually move into better matches.
Overall, the correlations between the AC and both measures of inflation are clearly negative, even including the pandemic, when the AC rose and peaked before the inflation wave of 2022-23, supporting the Great Resignation narrative, arguably caused by non-labour market factors. Our interpretation is that within-role job searching tends to be a deflationary force because the misallocation it addresses is countercyclical.
Conclusion for a modern economy
The traditional Phillips curve may not capture the full complexity of the link between labour markets and inflation. The concept of the job ladder and the dynamics of job-to-job switching offer a richer understanding of how aggregate shocks translate into wage and price pressures. Unemployment measures the quantity of unused human resources, but employment misallocation, captured by the acceptance rate, measures the quality of employment and a different, often slow-moving form of labour market slack.
By paying attention to measures like the AC, which is available in real time to policy-makers, central banks can gain crucial insights into latent price pressure that goes beyond the conventional unemployment rate. For example, a rising AC signals lower inflationary pressure, irrespective of the headline unemployment rate.
In an era of evolving labour dynamics, understanding how workers climb the job ladder is becoming an indispensable tool for forecasting inflation and guiding monetary policy.
