Does Inflation "Grease the Wheels of the Labor Market"?

David Card and Dean Hyslop

No 5538, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: If nominal wages are downward rigid, moderate levels of inflation may improve labor market efficiency by facilitating real wage cuts. In this paper we attempt to test the hypothesis that downward real wage changes occur more readily in higher-inflation environments. Using individual wage change data from two sources, we find that about 6-10 percent of workers experience nominally rigid wages in a 10- percent inflation environment. This proportion rises to over 15 percent at a 5 percent inflation rate. We use the assumption of symmetry to generate counterfactual distributions of real wage changes in the absence of rigidities. These counterfactual distributions suggest that a 1 percent increase in the inflation rate reduces the fraction of workers with downward-rigid wages by about 0.8 percent, and allows real wages to fall about 0.06 percent faster. A market- level analysis of the effects of nominal rigidities, based on wage growth and unemployment at the state level, is less conclusive. We find only a weak statistical relationship between the rate of inflation and the pace of relative wage adjustments across local labor markets.

JEL-codes: E31 J30 (search for similar items in EconPapers)
Date: 1996-04
Note: EFG LS ME
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (151)

Published as Reducing Inflation: Motivation and Strategy, C. Romer and D. Romer, eds.,(Chicago: University of Chicago Press, 1997)
Published as Does Inflation "Grease the Wheels of the Labor Market"? , David Card, Dean Hyslop. in Reducing Inflation: Motivation and Strategy , Romer and Romer. 1997

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