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Inflation And The Dispersion Of Real Wages

  • Alok Kumar

The article studies the effects of inflation on real wage dispersion in a search-monetary framework. The economy is characterized by frictions in both the goods and the labor markets. In the goods market, buyers and sellers bargain over prices, whereas in the labor market firms post wage offers. In equilibrium, a lower inflation rate increases the dispersion of real wages. This result is consistent with both the observed trends in wage dispersion and the inflation rate witnessed in the 1980s and the 1990s in the United States and the empirical literature linking reduced inflation to greater wage dispersion. Copyright �2008 by the Economics Department Of The University Of Pennsylvania And Osaka University Institute Of Social And Economic Research Association.

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File URL: http://www.blackwell-synergy.com/doi/abs/10.1111/j.1468-2354.2008.00484.x
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Article provided by Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association in its journal International Economic Review.

Volume (Year): 49 (2008)
Issue (Month): 2 (05)
Pages: 377-399

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Handle: RePEc:ier:iecrev:v:49:y:2008:i:2:p:377-399
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  1. Aico Van Vuuren & Gerard J. Van Den Berg & Geert Ridder, 2000. "Measuring the equilibrium effects of unemployment benefits dispersion," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 15(6), pages 547-574.
  2. Chatterjee, Satyajit & Corbae, Dean, 1992. "Endogenous Market Participation and the General Equilibrium Value of Money," Journal of Political Economy, University of Chicago Press, vol. 100(3), pages 615-46, June.
  3. Head, Allen & Shi, Shouyong, 2003. "A fundamental theory of exchange rates and direct currency trades," Journal of Monetary Economics, Elsevier, vol. 50(7), pages 1555-1591, October.
  4. Katz, Lawrence F. & Autor, David H., 1999. "Changes in the wage structure and earnings inequality," Handbook of Labor Economics, in: O. Ashenfelter & D. Card (ed.), Handbook of Labor Economics, edition 1, volume 3, chapter 26, pages 1463-1555 Elsevier.
  5. Robert E. Lipsey & Birgitta Swedenborg, 1997. "Wage Dispersion and Country Price Levels," NBER Working Papers 6039, National Bureau of Economic Research, Inc.
  6. Mortensen, D.T., 1998. "Equilibrium Unemployment with Wage Posting: Burdett-Mortensen Meet Pissarides," Papers 98-14, Centre for Labour Market and Social Research, Danmark-.
  7. Shi, Shouyong, 1999. "Search, inflation and capital accumulation," Journal of Monetary Economics, Elsevier, vol. 44(1), pages 81-103, August.
  8. Fuerst, Timothy S., 1992. "Liquidity, loanable funds, and real activity," Journal of Monetary Economics, Elsevier, vol. 29(1), pages 3-24, February.
  9. Leif Danziger, 1999. "A Dynamic Economy with Costly Price Adjustments," American Economic Review, American Economic Association, vol. 89(4), pages 878-901, September.
  10. Bontemps, C. & Robin, J.M. & van den Berg, G.J., 1998. "Equilibrium Search with Continuous Productivity Dispersion: Theory and Non-Parametric Estimation," Papers 98-07, Centre for Labour Market and Social Research, Danmark-.
  11. Fabien Postel-Vinay & Jean-Marc Robin, 2002. "The Distribution of Earnings in an Equilibrium Search Model with State-Dependent Offers and Counteroffers," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 43(4), pages 989-1016, November.
  12. repec:oup:restud:v:60:y:1993:i:1:p:53-68 is not listed on IDEAS
  13. Andrés Erosa & Gustavo Ventura, 2000. "On Inflation as a Regressive Consumption Tax," UWO Department of Economics Working Papers 20001, University of Western Ontario, Department of Economics.
  14. Merz, Monika, 1995. "Search in the labor market and the real business cycle," Journal of Monetary Economics, Elsevier, vol. 36(2), pages 269-300, November.
  15. Drazen, Allan & Hamermesh, Daniel S., 1987. "Inflation, indexation, and wage dispersion," Economics Letters, Elsevier, vol. 25(3), pages 225-231.
  16. repec:oup:restud:v:55:y:1988:i:3:p:353-76 is not listed on IDEAS
  17. Lucas, Robert Jr., 1982. "Interest rates and currency prices in a two-country world," Journal of Monetary Economics, Elsevier, vol. 10(3), pages 335-359.
  18. Allen Head & Alok Kumar, 2005. "Price Dispersion, Inflation, And Welfare," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 46(2), pages 533-572, 05.
  19. Rosholm, Michael & Svarer, Michael, 2000. "Wages, Training and Job Turnover in a Search-Matching Model," IZA Discussion Papers 223, Institute for the Study of Labor (IZA).
  20. 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.
  21. repec:oup:restud:v:44:y:1977:i:2:p:287-303 is not listed on IDEAS
  22. Lucas, Robert Jr., 1990. "Liquidity and interest rates," Journal of Economic Theory, Elsevier, vol. 50(2), pages 237-264, April.
  23. 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.
  24. repec:oup:restud:v:59:y:1992:i:2:p:299-329 is not listed on IDEAS
  25. Melvyn G. Coles, 2001. "Equilibrium Wage Dispersion, Firm Size and Growth," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 4(1), pages 159-187, January.
  26. Tobin, James, 1972. "Inflation and Unemployment," American Economic Review, American Economic Association, vol. 62(1), pages 1-18, March.
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