The Phillips Curve and Beveridge Curve in a Multi-Sector Economy
I develop a New Keynesian model with input–output linkages, search-and-matching frictions, and sticky prices to study how shocks propagate to output and inflation. Hiring costs tie firms’ marginal costs to local labor market tightness, creating a labor market propagation channel—distinct from input-price spillovers—by which higher demand in one sector raises wages and job-finding rates in that sector, redirects job search across sectors, and increases hiring costs elsewhere. Solving the model nonlinearly yields a Phillips curve that steepens as tightness rises, consistent with recent evidence, implying weaker output effects and stronger inflation responses to monetary policy when some sectors are tight. Calibrated to BEA input–output data and estimated using data from 2000–2019, the model shows that the post-pandemic shift toward demand for goods raised inflation and lowered matching efficiency; additional increases in job separations and aggregate demand are required to match the 2021–2023 inflation surge.