Fairness, ambiguity, wage markups and disinflation costs

Andre Lunardelli

MPRA Paper from University Library of Munich, Germany

Abstract: The notion that much of the reduction in disinflation costs in recent decades is due to better anchoring converges with the proposition of Dow, Simonsen and Werlang's (1993) that part of the sacrifice ratios of poorly anchored economies may be caused by coordination problems, which they modeled as ambiguity. The present paper associates ambiguity in disinflation with fairness in the labor market, but modeling it without an effective reduction in effort, and with inflation persistence, thus presenting similarities with Driscoll and Holden (2004). Bayesian inference with North American data with the model shows that the pattern here associated with ambiguity and fairness was especially pronounced during the Volcker disinflation, had local peaks after the oil shocks during the great inflation, did not happen following the wave of adverse productivity shocks after Volcker's macroeconomic anchorage, nor did it happen in the disinflation immediately after the COVID-19 pandemic. To make this inference, this paper models wage markup shocks by including in them factors such as an ambiguity premium, in contrast with the format that restricts them solely to shocks in the elasticity of substitution between different kinds of labor. This provides an explanation for the results of some well-known works with evidence compatible with the idea that increases in the (wide concept of) wage markups were a major cause of the increase of the unemployment rate and of the decrease in output during the Volcker disinflation. The paper concludes by briefly discussing ambiguity in disinflations of high and moderate inflations under both inflation targeting and exchange rate anchors.

Keywords: Disinflation; ambiguity; fairness; wage markups; sacrifice ratios; inflation persistence; Phillips curve; inflation targeting; Central Bank coordination of expectations. (search for similar items in EconPapers)
JEL-codes: D81 E31 E42 E50 J30 J60 (search for similar items in EconPapers)
Date: 2025-08-27
New Economics Papers: this item is included in nep-lab and nep-mon
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