Is Hypoinflation Good Policy?
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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Volume (Year): 24 (1998)
Issue (Month): 3 (September)
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References listed on IDEAS
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- Bound, John & Krueger, Alan B, 1991.
"The Extent of Measurement Error in Longitudinal Earnings Data: Do Two Wrongs Make a Right?,"
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- Erica L. Groshen & Mark E. Schweitzer, 1996.
"The effects of inflation on wage adjustments in firm-level data: grease or sand?,"
9, Federal Reserve Bank of New York.
- Erica L. Groshen & Mark E. Schweitzer, 1994. "The effects of inflation on wage adjustments in firm-level data: grease or sand?," Working Paper 9418, Federal Reserve Bank of Cleveland.
- Kahn, Shulamit, 1997. "Evidence of Nominal Wage Stickiness from Microdata," American Economic Review, American Economic Association, vol. 87(5), pages 993-1008, December.
- James Tobin, 1956. "Estimation of Relationships for Limited Dependent Variables," Cowles Foundation Discussion Papers 3R, Cowles Foundation for Research in Economics, Yale University.
- 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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