Why Do Workers Dislike Inflation? Wage Erosion and Conflict Costs

Joao Guerreiro (), Jonathon Hazell (), Chen Lian () and Christina Patterson ()
Additional contact information
Joao Guerreiro: UCLA
Jonathon Hazell: London School of Economics
Chen Lian: UC Berkeley
Christina Patterson: University of Chicago Booth School of Business

No 17339, IZA Discussion Papers from Institute of Labor Economics (IZA)

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 term "wage erosion"—how inflation would lower real wages if workers' conflict decisions did not respond to inflation. As a result, measuring welfare using observed wage growth understates the costs of inflation. We conduct a survey showing that workers are willing to sacrifice 1.75% of their wages to avoid conflict. Calibrating the model to the survey data, the aggregate costs of inflation incorporating conflict more than double the costs of inflation via falling real wages alone.

Keywords: inflation; wages; conflict (search for similar items in EconPapers)
JEL-codes: E31 J31 J52 (search for similar items in EconPapers)
Pages: 88 pages
Date: 2024-10
New Economics Papers: this item is included in nep-lab, nep-ltv and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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