Inflation and labor market flexibility: The squeaky wheel gets the grease

Ana Maria Loboguerrero and Ugo Panizza

P.O.L.I.S. department's Working Papers from Department of Public Policy and Public Choice - POLIS

Abstract: Inflation can “grease” the wheels of the labor market by relaxing downward wage rigidity but it can also increase uncertainty and have a negative “sand” effect. This paper studies the grease effect of inflation by looking at whether the interaction between inflation and labor market regulations affects how employment responds to changes in output. The results show that in industrial countries with highly regulated labor markets, the grease effect of inflation dominates the sand effect. In the case of developing countries, we rarely find a significant effect of inflation or labor market regulations and provide evidence indicating that this could be due to the presence of a large informal sector and limited enforcement of de jure labor market regulations.

Keywords: Employment; Unemployment; Flexibility; Inflation; Deflation; Job Security (search for similar items in EconPapers)
JEL-codes: E24 E31 E52 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-lab and nep-mac
Date: Written 2006-02
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Related works:
Working Paper: Inflation and Labor Market Flexibility: The Squeaky Wheel Gets the Grease (2003)
Working Paper: Inflation and Labor Market Flexibility: The Squeaky Wheel Gets the Grease (2004)
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