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Is Hypoinflation Good Policy?

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  • Wayne Simpson
  • Norman E. Cameron
  • Derek Hum
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    Abstract

    One argument against a policy to achieve absolute price stability is that workers resist pay cuts. We examine several Canadian microdata sources and corroborate earlier evidence of pay-cut resistance, particularly recently as inflation has approached zero. We then use data on industrial sectors to estimate that pay-cut resistance reduced employment growth by from 0.6 to 1.5 percent per annum from 1993 to 1995. We also estimate a model of wage settlements, treating pay freezes and pay cuts as censored data, which implies that pay-cut resistance may have increased the annual unemployment rate by as much as 2 percent during the same period. In view of these results, the case for very low inflation targets should be reexamined.

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    Bibliographic Info

    Article provided by University of Toronto Press in its journal Canadian Public Policy.

    Volume (Year): 24 (1998)
    Issue (Month): 3 (September)
    Pages: 291-308

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    Handle: RePEc:cpp:issued:v:24:y:1998:i:3:p:291-308

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    References

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    1. Kahn, Shulamit, 1997. "Evidence of Nominal Wage Stickiness from Microdata," American Economic Review, American Economic Association, vol. 87(5), pages 993-1008, December.
    2. James Tobin, 1956. "Estimation of Relationships for Limited Dependent Variables," Cowles Foundation Discussion Papers 3R, Cowles Foundation for Research in Economics, Yale University.
    3. Erica L. Groshen & Mark E. Schweitzer, 1996. "The effects of inflation on wage adjustments in firm-level data: grease or sand?," Staff Reports 9, Federal Reserve Bank of New York.
    4. Bound, John & Krueger, Alan B, 1991. "The Extent of Measurement Error in Longitudinal Earnings Data: Do Two Wrongs Make a Right?," Journal of Labor Economics, University of Chicago Press, vol. 9(1), pages 1-24, January.
    5. George A. Akerlof & William R. Dickens & George L. Perry, 1996. "The Macroeconomics of Low Inflation," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 27(1), pages 1-76.
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    Cited by:
    1. Louis N. Christofides & Thanasis Stengos, 2003. "Wage rigidity in Canadian collective bargaining agreements," Industrial and Labor Relations Review, ILR Review, Cornell University, ILR School, vol. 56(3), pages 429-448, April.
    2. Allan Crawford & Seamus Hogan, 1999. "Downward wage rigidity," Bank of Canada Review, Bank of Canada, vol. 1998(Winter), pages 29-48.
    3. Jean Louis, Rosmy & Balli, Faruk, 2013. "Low-inflation-targeting monetary policy and differential unemployment rate: Is monetary policy to be blamed for the financial crisis? — Evidence from major OECD countries," Economic Modelling, Elsevier, vol. 30(C), pages 546-564.
    4. Louis Christofides & Thanasis Stengos, 2001. "Nominal Wage Rigidity: Non-Parametric Tests Based on Union Data for Canada," CESifo Working Paper Series 535, CESifo Group Munich.
    5. Roderick Hill, 2000. "Real Income, Unemployment and Subjective Well-Being: Revisiting the Costs and Benefits of Inflation Reduction in Canada," Canadian Public Policy, University of Toronto Press, vol. 26(4), pages 399-414, December.
    6. Louis N. Christofides & Man Tuen Leung, 2002. "Nominal Wage Rigidity in Contract Data: A Parametric Approach," University of Cyprus Working Papers in Economics 0210, University of Cyprus Department of Economics.

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