Who's at Risk? Effects of Inflation on Unemployment Risk

TL;DR

This paper empirically examines how different types of inflation impact unemployment risks among various worker groups, highlighting the importance of inflation stabilization for equitable labor market growth.

Contribution

It introduces an instrumental variable quantile regression approach to analyze the distributional effects of supply- and demand-driven inflation on unemployment tail risks.

Findings

Supply-driven inflation increases unemployment tail risks for vulnerable workers.

Demand-driven inflation affects disparities based on race and unemployment reasons.

Inflation policies can unintentionally widen labor market inequalities.

Abstract

We empirically investigate the distributional effects of inflation on workers' unemployment tail risks using instrumental variable quantile regression. We find that supply-driven inflation disproportionately raises unemployment tail risks for cyclically vulnerable workers in both the short and medium term, while demand-driven inflation has differential effects -- limited to race and reason for unemployment -- only in the medium term. Demand-boosting policies, including monetary policy, can inadvertently widen those disparities through the inflation channel, underscoring the importance of inflation stabilization in promoting equitable growth in the labor market. Our findings could be explained structurally by heterogeneity in experienced inflation and wage inflation expectations.