Job Polarisation, Labour Market Fluidity and the Flattening of the Phillips Curve

Abstract

This paper shows that job polarisation –i.e., the disappearance of routine jobs– is changing the characteristics of the labour market. This has structural implications for the relationship between inflation and unemployment, the price Phillips Curve (PC). Using data from the European Monetary Union (EMU) and exploiting the fact that job polarisation accelerates during recessions, we obtain two empirical results. First, countries experiencing a bigger shift in the occupational structure during a downturn exhibit a flatter PC afterwards. Second, the occupational shifts experienced during the Great Recession and the Sovereign Debt Crisis explain more than a fourth of the flattening of the curve in the 2002-2018 period. Then, using a New Keynesian model with unemployment and search and matching frictions, we highlight a channel through which labour market characteristics operate on the slope of the PC. Increasing labour market fluidity –i.e., higher separation and hiring rate– decreases the slope of the PC. Using micro-data, we find that in the EMU non-routine jobs are more fluid. We conclude that job polarisation flattened the PC.