Insights

During 2021 and 2022, workers changed jobs at an unusually rapid pace. A recent paper points to a basic force behind it: workers were trying to keep up with inflation.

The question. Most wages are set in nominal terms, fixed in dollars and adjusted only now and then. When prices rise, the real value of a paycheck erodes between raises. Does the expectation of that erosion push workers to look for a new job?

What the authors find. Laura Pilossoph and Jane Ryngaert (2026) find that it does. Combining a survey experiment with the New York Fed’s Survey of Consumer Expectations (SCE), they find that a 1 percentage point increase in expected inflation raises the chance a worker searches for new work by about 0.7 percentage point. Applied to the post-pandemic rise in expectations, that response can account for roughly 40% of the increase in job-to-job transitions through mid-2022.

The Figure shows the two series the mechanism connects. One-year inflation expectations (teal line, left axis) and the job-to-job transition rate (red line, right axis) climbed together through 2021 and peaked within a few months of each other in the first half of 2022, expectations near 6.6% and job switching near 2.45% of the employed. In other words, expectations and job changes rose and fell as a pair through the inflation episode.

Why it matters. Changing jobs is one of the main ways workers secure raises. If inflation expectations drive search, and search drives job changes, then inflation can feed back into wages through the labor market itself, worker by worker.

The picture in 2026. The mechanism fit the 2021–24 episode closely. Since mid-2025 both series have turned up again, with expectations rising from about 3.0% to 3.6% and the job-to-job rate from 2.14% to 2.32%. Yet one piece is missing this time. Wage growth has not picked up alongside the renewed job switching. Whether that reflects a labor market that gives workers less leverage, or simply a lag before the pressure shows through, is not yet clear. The authors’ results suggest it is worth watching.

Nicolas Petrosky-Nadeau

Source: Pilossoph, Laura and Jane M. Ryngaert. “Job Search, Wages, and Inflation.” Working paper, 2026. Chart: author’s calculations using the New York Fed Survey of Consumer Expectations (one-year-ahead inflation expectations) and the Fujita, Moscarini, and Postel-Vinay employer-to-employer transition series; centered moving averages (expectations three-month, job-to-job rate six-month), January 2021 through June 2026.

The most useful number to have in hand when reading the monthly jobs report may be the pace of hiring that would hold the unemployment rate steady. Economists call it the “breakeven” pace. Add jobs faster than breakeven and unemployment falls; slower, and it rises.

Where Breakeven Comes From

Breakeven is labor force growth translated into jobs needed to hold unemployment steady. Each month new workers enter the labor force, and hiring has to keep up just to absorb them. So we build breakeven from the labor force itself—its recent path and its projected path—rather than from payrolls. Labor force growth has both a shorter and a longer trend, which gives two breakeven estimates. A long-run estimate isolates slow-moving demographic forces: population growth, aging, and the trend in participation. A short-run estimate adds the medium-frequency swings that come from, for instance, immigration and shifts in participation. We define the long-run measure as the multi-decade trend in the size of the labor force, and the short-run as movements over a period of about six years (Petrosky-Nadeau and Stewart 2024). Extending the labor force with Census population projections lets us carry both estimates forward.

Job Growth Has Tracked Short-Run Breakeven Down

The Figure plots both estimates against the 12-month average of payroll growth (teal line). Over the past two years that average has fallen from roughly 150,000 to about 40,000 jobs a month, staying close to short-run breakeven (gold line) the whole way down. Short-run breakeven now sits near 20,000, well below the long-run estimate of about 80,000 (navy line). Because hiring and breakeven fell together, the gap between them stayed small. And it is that gap that moves unemployment. In other words, job growth cooled sharply without raising unemployment: the number of jobs needed to keep pace fell just as fast.

Why Short-Run Breakeven Is Set to Rise

The dashed lines extend each estimate forward, and the short-run measure turns back up, climbing from near 20,000 toward the long-run pace of about 80,000 by the end of the decade. The reason is that short-run breakeven is low today precisely because labor force growth is running below its demographic trend, held down by a pullback in immigration and a flattening in participation after its post-pandemic rebound. As those transitory forces fade, labor force inflows revert to the slower demographic pace, and the number of jobs needed to keep the unemployment rate constant rises back toward 80,000.

Why It Matters

Recent payrolls offer a first, tentative sign of this turn. The 12-month average has edged up from about 10,000 early in 2026 to roughly 40,000 in June. It is too soon to read much into so short a run of data. But if hiring and breakeven climb together, unemployment could stay steady even as the labor market firms—the same arithmetic that kept it steady on the way down, now working in reverse.

These estimates and the projection are now an interactive chart on the Data page, where readers can adjust the smoothing of payroll growth and see how the short-run estimate depends on how the recent trend is extrapolated.

Nicolas Petrosky-Nadeau

Source: Bureau of Labor Statistics payroll employment (CES) and labor force (Current Population Survey) via FRED; U.S. Census Bureau population projections; and author's calculations. Breakeven method from Petrosky-Nadeau and Stewart (2024). Breakeven series through June 2026; projection to December 2028. Reference unemployment rate 4.4%.

In 2023, my coauthors and I sketched a path for a soft landing (Crust, Lansing, and Petrosky-Nadeau 2023). A nonlinear Phillips curve, relating core inflation to the ratio of unemployed workers to job vacancies, was very steep when that ratio sat below 1.0. So a modest easing of a red-hot labor market, achieved mainly by shrinking job openings rather than raising unemployment, could bring inflation down without a recession. For a while, that is roughly what happened.

The path down assumed the curve itself would hold still. As the 2023 analysis put it, inflation would fall back toward 2% “provided that the Phillips curve remains stable with well-anchored inflation expectations.”

What the Data Now Show

The recent readings no longer sit on that curve. The Figure updates the relationship with data through May 2026. From the March 2022 peak (red dot, unemployment-to-vacancy ratio near 0.5, core PCE inflation of 5.6%), the economy descended along the steep segment much as expected. But the points since January 2025 (gold) have settled at a ratio close to 1.0, a fairly normal degree of slack, while inflation has held near 3% and climbed to 3.4% by May 2026. The fitted 2023 curve (solid blue line) implies about 2.5% at that ratio. In other words, inflation is running roughly 0.9 percentage point above where the historical curve places it.

That gap is the signature of a curve moving outward (dashed line), rather than the economy sliding along a fixed curve. A useful benchmark is 2018 and 2019, when a comparably tight market ran inflation of only about 1.8%, well below the current rate despite less slack. Negative supply shocks, from tariffs to disruptions in energy markets, can produce exactly the pattern we see, lifting the inflation associated with any given level of slack.

Why It Matters

If the curve has shifted rather than the economy simply having stalled on the way down, the remaining distance to 2% is no longer a matter of a little more labor market cooling. It would require the curve to move back, or a significant slowing in demand.

Nicolas Petrosky-Nadeau

Source: Crust, Lansing, and Petrosky-Nadeau. “Reducing Inflation along a Nonlinear Phillips Curve.” FRBSF Economic Letter 2023-17. Chart: Bureau of Labor Statistics (JOLTS, Current Population Survey), Bureau of Economic Analysis, and author's calculations; data through May 2026. Solid line is the nonlinear Phillips curve fitted through 2023; dashed line illustrates an outward shift through the recent data.

Commentators increasingly describe the current U.S. labor market as a “low-hire, low-fire” environment: firms are reluctant to add workers but equally reluctant to let them go. The low-fire half of that description rests largely on the Job Openings and Labor Turnover Survey (JOLTS), where the layoffs and discharges rate has held near record lows. JOLTS, however, began only in December 2000. It spans just two recessions, too few to judge whether today's low layoff rate is genuinely unusual or simply what a strong labor market looks like.

Research by Kathrin Ellieroth and Amanda Michaud offers a way to extend the view (Ellieroth and Michaud, 2024). The authors build a monthly series of layoffs from the Bureau of Labor Statistics (BLS) Current Population Survey (CPS), the household survey, by linking individuals across consecutive months and classifying each job separation by its stated reason. Their series, which they update and publish monthly, reaches back to 1978 and covers six recessions. Because it draws on the household survey, it can also be broken out by worker characteristics in ways JOLTS cannot, such as by age. The Figure plots the CPS layoff rate for all workers age 16 and older (blue line) and for prime-age workers, those 25 to 54 (teal line), alongside the JOLTS layoffs and discharges rate where it is available (salmon line). All series rise sharply in every recession and recede in each expansion.

Taking the long view, the layoff rate shows little trend, or at most a mild one, over nearly five decades once the aging of the workforce is taken into account. That is, the mild downward trend in the overall layoff rate may be related to the changing age composition of the workforce: focusing on the core of the workforce, people aged 25 to 54 years old, removes most of the downward trend. The prime-age layoff rate troughs at around 1% in each of the expansions in the sample. This perspective isn’t evident when considering the JOLTS layoff rate alone.

Why it matters: This longer perspective, together with accounting for the aging of the workforce, reframes the low-fire narrative. A low layoff rate, particularly among prime-age workers, is not a recent departure but a recurring feature of late-expansion labor markets. The current level, though a touch low, is not out of line with what prior strong economies produced. The value of the Ellieroth and Michaud series is that it lets us see this regularity at all. Seen beside the CPS measure, the JOLTS record covers only the most recent stretch of an otherwise stable history. As such, the low layoff rate of today looks less puzzling. Whether this persists will depend on the path of the broader economy.

Nicolas Petrosky-Nadeau

Source: Ellieroth, Kathrin and Amanda Michaud. “Quits, Layoffs, and Labor Supply.” Working paper, 2024. Chart shows the CPS layoff rate (share of employment), seasonally adjusted, as 12-month moving averages; JOLTS layoffs and discharges shown from December 2000.

In August 2020, the Federal Reserve revised its Statement on Longer-Run Goals and Monetary Policy Strategy. One change stood out in how the Fed described its employment mandate. The previous framework guided monetary policy to respond to “deviations” of employment from its maximum level—tightening when the labor market ran hot, easing when it ran cold. The revised framework narrowed this to “shortfalls,” leading policy to respond only when employment fell below its maximum. In other words, a tight labor market would no longer, on its own, trigger a policy response.

The Question

What are the consequences of this asymmetry? Does removing the response to above-maximum employment come at a cost?

In Bundick and Petrosky-Nadeau (2025) we explore this question using a New Keynesian model with labor market frictions—hiring costs, separations, and a matching process for workers and firms—alongside a zero lower bound (ZLB) on interest rates. The key mechanism is straightforward: by not responding to above-maximum employment, the shortfalls rule removes one channel through which monetary policy anchors inflation expectations.

What the Model Finds

Under the shortfalls rule, average inflation in the calibrated model rises by approximately 90 basis points relative to the symmetric deviations rule. The figure illustrates this shift. The solid blue line shows the distribution of year-on-year inflation under the deviations rule, which spreads widely and evenly, extending into deflationary territory. By contrast, the dashed red line shows the shortfalls rule shifting the distribution of inflation outcomes toward higher rates on average, and significantly reducing episodes of inflation below the 2% target.

This is not simply a level shift. Because the central bank no longer tightens in response to an overheating labor market, demand-driven expansions generate higher inflation than under the symmetric rule. The asymmetry in the policy rule produces an asymmetry in inflation outcomes.

When the Bias Can Be Beneficial

The higher average inflation carries an important upside. Under the deviations rule, the economy reaches the ZLB—where the central bank can no longer reduce rates—approximately 26% of the time. Under the shortfalls rule, that frequency drops to less than 1%. In other words, the inflation bias acts as insurance in that higher average inflation keeps interest rates elevated enough that the central bank retains room to cut in downturns.

Nicolas Petrosky-Nadeau

Source: Bundick, Brent and Nicolas Petrosky-Nadeau. “Employment Shortfalls and the Zero Lower Bound.” American Economic Journal: Macroeconomics, 2025. Chart adapted from Figure 4.

2026's first three months of payroll data come on the heels of concerns that job gains have been driven by a single sector in recent years. While headlines focus on overall numbers, the underlying pattern shows education and health services essentially carrying the entire labor market. Most other major sectors are either contracting or stagnant.

What comes next depends on whether other sectors stabilize and resume hiring, and whether education and health services can continue shouldering the entire burden of job creation. March's data offer some hope: several sectors that contracted in February are back to growth. But until job growth broadens convincingly beyond education and health services, the labor market feels uncomfortably balanced on a narrow base.

From Broad-Based to Narrow

Industry-level employment data from the Bureau of Labor Statistics show how the breadth of job growth has narrowed since the robust gains of 2023. Payroll gains averaged 256,000 per month in the first half of that year, with broad contributions across multiple sectors. By late 2025, that growth had disappeared—the second half saw average net monthly losses of 16,000 jobs as sectors shed workers simultaneously.

Volatility Masks the Trends

Early 2026 shows large swings that cloud our view of underlying trends in sectoral job growth. January's 156,000 gain collapsed to a 125,000 loss in February before rebounding to 168,000 in March. This illustrates the challenge of reading the labor market with each incoming data release.

Yet across these three months, education and health services combined with leisure and hospitality accounted for the vast majority of job creation, continuing the overall pattern of previous years. Finance and information posted consecutive losses, while transportation and warehousing swung from +26,000 in January to -37,000 in February to +21,000 in March. It is too soon to tell what trends are taking hold in 2026.

The Sustainability Question

One question going forward is whether an economy can sustain expansion when job creation concentrates so heavily in one sector while others stagnate. History isn't all that reassuring—broad-based employment growth typically characterizes healthy expansions.

Nicolas Petrosky-Nadeau

Data: Bureau of Labor Statistics, Current Employment Statistics (seasonally adjusted). Chart shows six-month averages (2023–2025) and monthly values (2026) for eight industry groups.