Autonomous Wage Inflation
AbstractThis paper develops a theory of stagflation, based on turnover-efficiency-wage theory. In these theories, wages are forward-looking, i.e., set to keep incumbents with the firm. The employed workers apply for better jobs and compete with unemployed applicants. An employed applicant is, however, preferred to an unemployed applicant, or the long-term unemployed, who, with their outdated skills, form an essentially non-competing group. Consider now the case that the monetary authority succeeds in stabilizing the price level permanently. Start from efficiency-wage unemployment equilibrium. The skills of the unemployed will, after a while, become outdated. This reduces the „effective” rate of unemployment and causes the labor market to tighten. Turnover increases, and the former equilibrium is destroyed. The individual firm will raise wages in order to reduce turnover costs. Costs increase, causing prices to also increase. The monetary authority reacts with restrictive policies, and unemployment increases. This leads to a new turnover-efficiency-wage equilibrium, and the process continues. The argument implies that wage inflation emerges after a while at all employment levels. This paper concludes by discussing some of the consequent policy implications.
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This chapter was published in: Schlicht, Ekkehart , , pages , .
This item is provided by University of Munich, Department of Economics in its series Chapters in Economics with number 11090.
stagflation; efficiency wages; turnover; natural rate; business cycles; stabilization policy; indexation; macroeconomic externalities;
Find related papers by JEL classification:
- E10 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - General
- E12 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Keynes; Keynesian; Post-Keynesian
- E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
- E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
- E64 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Incomes Policy; Price Policy
- J5 - Labor and Demographic Economics - - Labor-Management Relations, Trade Unions, and Collective Bargaining
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- Pfeiffer, Friedhelm, 1999. "Lohnflexibilisierung aus volkswirtschaftlicher Sicht," ZEW Dokumentationen 99-01, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
- Pull, Kerstin, 1999. "What is the fair wage? A model of as-if-co-operation," Quint-Essenzen 58, Institute for Labour Law and Industrial Relations in the European Community (IAAEG), University of Trier.
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