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Inflation and the Dispersion of Real Wages

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  • Alok Kumar

Abstract

The effects of inflation on real wage dispersion and welfare are studied in a cash-in-advance economy with a Walrasian goods market but a labor market with search friction. In the labor market, firms post wages and both employed and unemployed workers search among the posted wages. In equilibrium, a higher inflation rate reduces the dispersion in real wages. This result is consistent with both the observed trends in wage dispersion and the inflation rate witnessed in the 1980's and the 1990's in the U.S. and the empirical literature linking reduced inflation to greater wage dispersion. While higher inflation always lowers consumption, output, and employment, the optimal inflation rate exceeds the Friedman ru

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Bibliographic Info

Paper provided by Econometric Society in its series Econometric Society 2004 Far Eastern Meetings with number 750.

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Date of creation: 11 Aug 2004
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Handle: RePEc:ecm:feam04:750

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Keywords: Inflation; Wage Posting; Search; Dispersion of Real;

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References

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  1. Benabou, Roland, 1988. "Search, Price Setting and Inflation," Review of Economic Studies, Wiley Blackwell, vol. 55(3), pages 353-76, July.
  2. Drazen, Allan & Hamermesh, Daniel S., 1987. "Inflation, indexation, and wage dispersion," Economics Letters, Elsevier, vol. 25(3), pages 225-231.
  3. Diamond, Peter A, 1993. "Search, Sticky Prices, and Inflation," Review of Economic Studies, Wiley Blackwell, vol. 60(1), pages 53-68, January.
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  5. Vuuren, Aico van & Berg, Gerard J. van den & Ridder, Geert, 1999. "Measuring the equilibrium effects of unemployment benefits dispersion," Serie Research Memoranda 0043, VU University Amsterdam, Faculty of Economics, Business Administration and Econometrics.
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  9. Shouyong Shi, 1998. "Search, Inflation, and Capital Accumulation," Working Papers 971, Queen's University, Department of Economics.
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  23. 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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  25. Burdett, Kenneth & Mortensen, Dale T, 1998. "Wage Differentials, Employer Size, and Unemployment," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 39(2), pages 257-73, May.
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Cited by:
  1. Alok Kumar, 2008. "Capital Tax, Minimum Wage, and Labor Market Outcomes," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 11(1), pages 133-154, January.

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