If nominal wages are downward rigid, moderate levels of inflation may improve labor market efficiency by facilitating real wage cuts. In this paper we attempt to test the hypothesis that downward real wage changes occur more readily in higher-inflation environments. Using individual wage change data from two sources, we find that about 6-10 percent of workers experience nominally rigid wages in a 10- percent inflation environment. This proportion rises to over 15 percent at a 5 percent inflation rate. We use the assumption of symmetry to generate counterfactual distributions of real wage changes in the absence of rigidities. These counterfactual distributions suggest that a 1 percent increase in the inflation rate reduces the fraction of workers with downward-rigid wages by about 0.8 percent, and allows real wages to fall about 0.06 percent faster. A market- level analysis of the effects of nominal rigidities, based on wage growth and unemployment at the state level, is less conclusive. We find only a weak statistical relationship between the rate of inflation and the pace of relative wage adjustments across local labor markets.
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5538.
Length: Date of creation: Apr 1996 Date of revision: Publication status: published relationship to a non-chapter. This should not happen. Please contact NBER. Handle: RePEc:nbr:nberwo:5538
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Find related papers by JEL classification: E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation J30 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - General
References listed on IDEAS Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
David Card, 1995.
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David G. Blanchflower & Andrew J. Oswald, 1990.
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Blanchflower, D. & Oswald, A., 1989.
"The Wage Curve,"
Papers
340, London School of Economics - Centre for Labour Economics.
Robert J. Shiller, 1997.
"Why Do People Dislike Inflation?,"
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in: Reducing Inflation: Motivation and Strategy, pages 13-70
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