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Fairness and Inflation Persistence

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Author Info
John C. Driscoll (Federal Reserve Board,)
Steinar Holden (University of Oslo and Norges Bank,)

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Abstract

We argue that peoples' concern for fairness may explain an unsolved puzzle in macroeconomics: the persistence of inflation. We extend a 1990 wage-contracting model of Bhaskar in which workers' disutility from being paid less than other workers exceeds their utility from being paid more. This model generates a continuum of equilibria over a range of wages and unemployment rates. If workers' expectations are based on the past behavior of wage growth, these beliefs will be self-fulfilling, generating inflation persistence within, but not outside of, this range. Based on quarterly U.S. data over the period 1955-2000, we find evidence that inflation is more persistent between unemployment rates of 4.7 and 6.5% than outside these bounds. (JEL: E31, E3, E5) Copyright (c) 2004 The European Economic Association.

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Publisher Info
Article provided by MIT Press in its journal Journal of the European Economic Association.

Volume (Year): 2 (2004)
Issue (Month): 2-3 (04/05)
Pages: 240-251
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Handle: RePEc:tpr:jeurec:v:2:y:2004:i:2-3:p:240-251

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  1. Holden, Steinar & Wulfsberg, Fredrik, 2007. "Are real wages rigid downwards?," Memorandum 07/2007, Oslo University, Department of Economics. [Downloadable!]
    Other versions:
  2. Kari O. E. Alho, 2006. "Labour Market Institutions and the Effectiveness of Tax and Benefit Policies in Enchancing Employment: A General Equilibrium Analysis," Discussion Papers 1008, The Research Institute of the Finnish Economy. [Downloadable!]
  3. Steinar Holden & Fredrik Wulfsberg, 2007. "How strong is the case for downward real wage rigidity?," Working Papers 07-6, Federal Reserve Bank of Boston. [Downloadable!]
  4. Kai Christoffel & Tobias Linzert, 2005. "The Role of Real Wage Rigidity and Labor Market Frictions for Unemployment and Inflation Dynamics," IZA Discussion Papers 1896, Institute for the Study of Labor (IZA). [Downloadable!]
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  5. Jenny Lye & Ian McDonald, 2008. "The Eisner Puzzle, the Unemployment Threshold and the Range of Equilibria," International Advances in Economic Research, Springer, vol. 14(2), pages 125-141, May. [Downloadable!] (restricted)
  6. Nunziata, Luca & Bowdler, Christopher, 2005. "Inflation Adjustment and Labour Market Structures: Evidence from a Multi-Country Study," IZA Discussion Papers 1510, Institute for the Study of Labor (IZA). [Downloadable!]
    Other versions:
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