On-the-job search and inflation under the microscope

We develop a model where heterogeneous agents choose whether to engage in onthe-job search (OJS) to improve labor income. The model accounts for untargeted microdata patterns: fiscal incentives affect job-to-job mobility and wage growth of stayers-but not leavers-across the income distribution, pointing to OJS as a key driver of labor costs. Calibrated to micro and macro moments, the model shows that OJS cost shocks significantly affect real activity and inflation. The permanent decline in OJS costs-driven by ICT and AI-based tools-offers a novel explanation for the weakening of the unemployment-inflation relationship documented in empirical studies.