The Inflation of Resetting Workers

TL;DR

This paper reveals that the standard Phillips curve misses a key term related to workers' wage reset behavior, significantly affecting inflation predictions and policy impacts across countries.

Contribution

It introduces a new first-order term into the Phillips curve, incorporates it into a multi-country HANK model, and demonstrates its importance for inflation and policy analysis.

Findings

Omitted term accounts for 7% more cumulative inflation in baseline.

Delayed monetary policy increases inflation by 10-26%.

Country composition explains 6.6 percentage-point-quarters differences.

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.