Research

We develop a tractable, dynamic extension of Bloesch and Larson (2023), in which firms post wages and workers search on the job, to investigate the effect on wages of a pure cost of living shock, i.e., a shock that raises the price of households' consumption bundle without affecting the marginal product of labor.  If an increase in the cost of living makes unemployment more attractive, firms are forced to raise wages to retain workers, delivering pass through from cost of living to wages. However, we show quantitatively that allowing workers to search on the job dramatically weakens this channel by making competition for already-employed workers the primary force in wage determination. Our results imply that for economies like the modern United States, where on-the-job search and wage posting are common, there is little scope for supply shock-induced wage-price spirals fueled by workers' ability to command higher nominal wages in response to higher nominal prices. 

In standard models of labor market monopsony, the profits derived from firm monopsony power depends on the firm's labor supply elasticity. There are two puzzles facing these standard models. First, different standard approaches to estimating labor supply elasticities produce dramatically different estimates and hence measures of profits from monopsony power. Second, commonly used low labor supply elasticities imply profit shares of aggregate income that are too high after accounting for price markups and capital income. This paper argues that both of these issues arise from the same limitation - that firms can increase employment only by raising wages. To address this, we develop a tractable model where firms use both higher wages and costly recruiting expenditures to attract workers. Firms have wage setting power due both to search frictions and workers' heterogeneous preferences over workplaces. We show that whether firms profit from their wage setting power depends on the shape of firms' recruiting cost function, and the rents acquired by firms from wage setting power can be dissipated by recruiting costs. In a calibrated quantitative model that also accounts for the strategic behavior of a large firm, profits from wage setting power account for 6% of labor market-wide marginal product and 5% of output. Our findings suggest that wage setting power alone does not imply profits for firms that exploit this power.

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We argue that secular change in both the production and composition of investment goods has weakened private investment's role in the transmission of monetary policy to labor earnings and consumption. We show analytically that fluctuations in the production of investment goods amplify the response of consumption to monetary policy shocks by varying labor income for hand-to-mouth agents. We document three secular changes that weaken this channel: (i) labor's share of value added in investment goods production has declined, (ii) the import share of investment goods has risen, and (iii) the composition of investment has shifted towards components that are less responsive to monetary policy. A small open economy, two agent New Keynesian model calibrated to match these facts implies a 38% and 26% weaker response of labor income and aggregate consumption, respectively, to real interest rate shocks in a 2010's economy relative to a 1960's economy. 

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