CNN
 — 

Back in 2022, when the labor market was so hot that Beyoncé even released a song about it, Americans were job hopping in large numbers, boosting their salary in the process.

The Great Resignation was in full swing.

That fueled fears of a “wage-price spiral” — where wages and prices perpetually rise and feed off each other.

But what appeared to be a hot job market was actually a symptom — not the cause — of the recent bout of inflation, according to new research that explored the consequences of unexpected rising prices on the labor market.

Maybe it wasn’t even a hot labor market at all: Rising prices chomped away at people’s paychecks, forcing some workers to make drastic and costly decisions to switch jobs, according to the new working paper, “A Theory of How Workers Keep Up With Inflation.” That in turn drove vacancies higher, while layoffs and the overall unemployment rate remained historically low, giving the appearance of a tight labor market.

“There are periods when there are shocks to labor demand that puts upward pressure on real wages, which will then have pass-throughs to output prices,” said co-author Erik Hurst, an economist and professor at the University of Chicago Booth School of Business. “In those periods when labor demand goes up, you will see other signs of a hot labor market, like real wages rising; you’ll see employment increasing; you’ll see the job-finding rate of the unemployed go up.”

“None of those things happened in this period,” he added.

Plus, real wages (which take into account the impact of inflation) are about 4.4% below where they were expected to be, based on pre-pandemic trends, he said.

Moreover, data from the Bureau of Labor Statistics showed that year-over-year real average hourly earnings growth dropped for 25 consecutive months. Average hourly pay has outpaced inflation since May 2023 but still hasn’t returned to where it was before inflation spiked.

Back in early 2021, when workers were losing money fast, they likely took steps to keep that from happening, according to the paper, which Hurst co-authored with economists from Columbia University, the Federal Reserve Bank of Atlanta and the University of Texas at Austin.

Those potential responses included renegotiating wages at their existing firm, testing the job market waters to jump ship to another firm, or “simply quit to unemployment if they find their eroded wages to be too low,” the economists wrote.

Each one of those actions comes with additional costs, they noted.

Renegotiations ultimately can make future wage changes more infrequent, and they can signal a lack of commitment. Job searches have been shown to have direct monetary costs as well as indirect costs (stress, health, productivity), and unemployment can carry stark risks, including lost wages and related ripple effects as well as an erosion of skills, research has shown.

“Part of the ‘Great Reshuffling’ could have been because of the inflation,” Hurst said.

Still, at the time this activity was happening and the vacancy-to-unemployment rate soared to historically high levels, it instilled uncertainty among academics, economists and key policymakers alike, according to the paper.

Notably, in November 2022 (six months after the Federal Reserve started to hike interest rates) Fed Chair Jerome Powell declared that “the broader picture is of an overheated labor market where demand exceeds supply.”

It wasn’t until two years later, when the labor market seemed to be quickly faltering, that the Fed finally started to bring down interest rates via a jumbo-sized, half-point cut.

“We know that policymakers were reticent to act too soon, because they were concerned about potential inflationary pressures of the ‘hot’ labor market,” Hurst said. “So having a better understanding of what’s going on in a labor market will be a good input into potential policy decisions.”

That could include looking more closely into how wages are changing, who’s quitting, who’s being hired and whether there are distinct changes in how job seekers find work. That could all help play a key role in evaluating whether the labor market is driving inflation — or whether it’s the other way around.