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

2025-05-09

AI Summary

This study examines the heterogeneous effects of inflation types—supply-driven versus demand-driven—on unemployment tail risk among workers, with particular focus on cyclical vulnerability (e.g., specific racial groups, those unemployed for economic reasons). Employing instrumental variable quantile regression (IV-QR), the paper provides the first causal identification of these distinct inflation channels. It further develops a structural framework grounded in the gap between realized inflation and wage-inflation expectations to interpret observed heterogeneity. Results show that supply-driven inflation systematically exacerbates unemployment tail risk for vulnerable groups, rejecting the “inflation neutrality” hypothesis; in contrast, demand-driven inflation exerts only selective, medium-term effects on certain subpopulations. The findings deliver critical empirical evidence for monetary policy design that jointly pursues price stability and labor market equity.

Technology Category

• Game Theory and Economic Paradigms: Mechanism Design
• Machine Learning: Calibration & Uncertainty Quantification
• Reasoning under Uncertainty: Causality

Application Category

• Economics, Online Markets and Human Computation: LLM based quality controls for crowd work
• Responsible Web: Human-perceived consequences of algorithmic deployment on the web
• Web Mining and Content Analysis: Bridging structured and unstructured data

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.

Problem

• Investigates inflation's unequal impact on unemployment risks
• Compares supply vs demand-driven inflation effects on vulnerable workers
• Examines policy impacts on labor market inequality via inflation

Innovation

• Instrumental variable quantile regression analysis
• Differentiates supply-driven vs demand-driven inflation effects
• Links inflation stabilization to equitable labor growth