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Inflation and Labour Market Adjustment

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  • Hamermesh, Daniel S

Abstract

The implications of downward nominal and ex ante real wage rigidity,and of wage contracting for the dispersion of relative wage changes in the presence of price inflation are examined. Rigidity implies that unexpected inflation will raise the variability of relative wage changes; contracting implies unexpected inflation reduces variability. Using data on manufacturing industries for 1955-81, and on private nonfarm industries for1965-81,these hypotheses are studied. The dispersion in relative wage cnanges is reduced by greater price inflation. Most of the reduction is a response to unexpected inflation: Expected inflation has little impact on dispersion.These findings hold for subperiods within the sample, and are robust to different choices of measures of price expectations,including those of the Livingston survey, the Survey Research Center household data, and ARMA forecasts. They stand in striking contrast to the commonly accepted result that price inflation is associated with greater dispersion of relative price changes. They suggest that inflation reduces the ability of relative wages to signal disequilibria among labor markets.

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Bibliographic Info

Article provided by London School of Economics and Political Science in its journal Economica.

Volume (Year): 53 (1986)
Issue (Month): 29 (February)
Pages: 63-73

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Handle: RePEc:bla:econom:v:53:y:1986:i:29:p:63-73

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References

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  1. MaCurdy, Thomas E, 1981. "An Empirical Model of Labor Supply in a Life-Cycle Setting," Journal of Political Economy, University of Chicago Press, vol. 89(6), pages 1059-85, December.
  2. Fischer, Stanley, 1982. "Relative price variability and inflation in the United States and Germany," European Economic Review, Elsevier, vol. 18(1), pages 171-196.
  3. Lucas, Robert E, Jr & Rapping, Leonard A, 1969. "Real Wages, Employment, and Inflation," Journal of Political Economy, University of Chicago Press, vol. 77(5), pages 721-54, Sept./Oct.
  4. Hamermesh, Daniel S, 1970. "Wage Bargains, Threshold Effects, and the Phillips Curve," The Quarterly Journal of Economics, MIT Press, vol. 84(3), pages 501-17, August.
  5. Parks, Richard W, 1978. "Inflation and Relative Price Variability," Journal of Political Economy, University of Chicago Press, vol. 86(1), pages 79-95, February.
  6. Fischer, Stanley, 1982. "Relative price variability and inflation in the United States and Germany," European Economic Review, Elsevier, vol. 18(2), pages 171-196.
  7. Altonji, Joseph G, 1982. "The Intertemporal Substitution Model of Labour Market Fluctuations: An Empirical Analysis," Review of Economic Studies, Wiley Blackwell, vol. 49(5), pages 783-824, Special I.
  8. Rees, Albert, 1970. "The Phillips Curve as a Menu for Policy Choice," Economica, London School of Economics and Political Science, vol. 37(147), pages 227-38, August.
  9. Beach, Charles M & MacKinnon, James G, 1978. "A Maximum Likelihood Procedure for Regression with Autocorrelated Errors," Econometrica, Econometric Society, vol. 46(1), pages 51-58, January.
  10. Tobin, James, 1972. "Inflation and Unemployment," American Economic Review, American Economic Association, vol. 62(1), pages 1-18, March.
  11. Wachter, Michael L, 1970. "Cyclical Variation in the Interindustry Wage Structure," American Economic Review, American Economic Association, vol. 60(1), pages 75-84, March.
  12. Friedman, Milton, 1977. "Nobel Lecture: Inflation and Unemployment," Journal of Political Economy, University of Chicago Press, vol. 85(3), pages 451-72, June.
  13. Azariadis, Costas, 1975. "Implicit Contracts and Underemployment Equilibria," Journal of Political Economy, University of Chicago Press, vol. 83(6), pages 1183-1202, December.
  14. Cukierman, Alex & Wachtel, Paul, 1982. "Relative Price Variability and Nonuniform Inflationary Expectations," Journal of Political Economy, University of Chicago Press, vol. 90(1), pages 146-57, February.
  15. Lilien, David M, 1982. "Sectoral Shifts and Cyclical Unemployment," Journal of Political Economy, University of Chicago Press, vol. 90(4), pages 777-93, August.
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Cited by:
  1. Erica L. Groshen & Mark E. Schweitzer, 1994. "The effects of inflation on wage adjustments in firm-level data: grease or sand?," Working Paper 9418, Federal Reserve Bank of Cleveland.
  2. Erica L. Groshen & Mark E. Schweitzer, 1996. "Macro- and microeconomic consequences of wage rigidity," Working Paper 9607, Federal Reserve Bank of Cleveland.
  3. Smith, Peter N. & Thomas, Stephen H., 1991. "Wage dispersion and inflation : Evidence from U.K. manufacturing industries," Economics Letters, Elsevier, vol. 37(4), pages 357-362, December.
  4. Steven G. Allen, 1987. "Relative Wage Variability in the United States, 1860-1983," NBER Working Papers 2221, National Bureau of Economic Research, Inc.
  5. Andre Portela Souza, 2002. "Wage Inequality Changes in Brazil: Market Forces, Macroeconomic Instability and Labor Market Institutions (1981-1997)," Vanderbilt University Department of Economics Working Papers 0215, Vanderbilt University Department of Economics.

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