Why do workers dislike inflation? Wage erosion and conflict costs

João Guerreiro, Joe Hazell, Chen Lian and Christina Patterson

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

Abstract: How costly is inflation to workers? Answers to this question have focused on the path of real wages during inflationary periods. We argue that workers must take costly actions (“conflict”) to have nominal wages catch up with inflation, meaning there are welfare costs even if real wages do not fall as inflation rises. We study a menu-cost style model, where workers choose whether to engage in conflict with employers to secure a wage increase. We show that, following a rise in inflation, wage catch-up resulting from more frequent conflict does not raise welfare. Instead, the impact of inflation on worker welfare is determined by what we call “wage erosion”—how inflation would lower real wages if workers’ conflict decisions did not respond to inflation. As a result, using observed wage growth to measure worker welfare understates the costs of inflation. We conduct a survey showing that workers are willing to sacrifice around 1.75% of their wages to avoid conflict. Calibrating the model to survey data, we find that incorporating conflict significantly raises the costs of inflation for workers.

Keywords: inflation; labor market; wage rigidity; conflict costs; worker welfare; Inflation (search for similar items in EconPapers)
JEL-codes: J01 J1 R14 (search for similar items in EconPapers)
Pages: 34 pages
Date: 2026-09
New Economics Papers: this item is included in nep-mon
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Published in Econometrica, September, 2026, 94(5), pp. 1651-1684. ISSN: 0012-9682

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Persistent link: https://EconPapers.repec.org/RePEc:ehl:lserod:130233

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