IDEAS home Printed from https://ideas.repec.org/h/nbr/nberch/8882.html
   My bibliography  Save this book chapter

Does Inflation "Grease the Wheels of the Labor Market"?

In: Reducing Inflation: Motivation and Strategy

Author

Listed:
  • David Card
  • Dean Hyslop

Abstract

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.
(This abstract was borrowed from another version of this item.)

Suggested Citation

  • David Card & Dean Hyslop, 1997. "Does Inflation "Grease the Wheels of the Labor Market"?," NBER Chapters, in: Reducing Inflation: Motivation and Strategy, pages 71-122, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberch:8882
    as

    Download full text from publisher

    File URL: http://www.nber.org/chapters/c8882.pdf
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. David G. Blanchflower & Andrew J. Oswald, 1995. "The Wage Curve," MIT Press Books, The MIT Press, edition 1, volume 1, number 026202375x.
    2. Gary Solon & Robert Barsky & Jonathan A. Parker, 1994. "Measuring the Cyclicality of Real Wages: How Important is Composition Bias?," The Quarterly Journal of Economics, Oxford University Press, vol. 109(1), pages 1-25.
    3. Olivier Jean Blanchard & Lawrence F. Katz, 1992. "Regional Evolutions," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 23(1), pages 1-76.
    4. David Card, 1995. "The Wage Curve: A Review," Working Papers 722, Princeton University, Department of Economics, Industrial Relations Section..
    5. Robert J. Shiller, 1997. "Why Do People Dislike Inflation?," NBER Chapters, in: Reducing Inflation: Motivation and Strategy, pages 13-70, National Bureau of Economic Research, Inc.
    6. David Card, 1995. "The Wage Curve: A Review," Journal of Economic Literature, American Economic Association, vol. 33(2), pages 285-299, June.
    7. Kahn, Shulamit, 1997. "Evidence of Nominal Wage Stickiness from Microdata," American Economic Review, American Economic Association, vol. 87(5), pages 993-1008, December.
    8. Tobin, James, 1972. "Inflation and Unemployment," American Economic Review, American Economic Association, vol. 62(1), pages 1-18, March.
    9. Krueger, Alan B & Summers, Lawrence H, 1988. "Efficiency Wages and the Inter-industry Wage Structure," Econometrica, Econometric Society, vol. 56(2), pages 259-293, March.
    10. Steven J. Davis & John Haltiwanger, 1992. "Gross Job Creation, Gross Job Destruction, and Employment Reallocation," The Quarterly Journal of Economics, Oxford University Press, vol. 107(3), pages 819-863.
    11. repec:fth:prinin:343 is not listed on IDEAS
    12. Card, David, 1996. "The Effect of Unions on the Structure of Wages: A Longitudinal Analysis," Econometrica, Econometric Society, vol. 64(4), pages 957-979, July.
    13. David E. Lebow & David J. Stockton & William L. Wascher, 1995. "Inflation, nominal wage rigidity, and the efficiency of labor markets," Finance and Economics Discussion Series 95-45, Board of Governors of the Federal Reserve System (U.S.).
    14. Brown, James N & Light, Audrey, 1992. "Interpreting Panel Data on Job Tenure," Journal of Labor Economics, University of Chicago Press, vol. 10(3), pages 219-257, July.
    15. McLaughlin, Kenneth J., 1994. "Rigid wages?," Journal of Monetary Economics, Elsevier, vol. 34(3), pages 383-414, December.
    16. David G. Blanchflower & Andrew J. Oswald, 1995. "The Wage Curve," MIT Press Books, The MIT Press, edition 1, volume 1, number 026202375x, March.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Patrick A. Puhani, 2000. "On the Identification of Relative Wage Rigidity Dynamics," William Davidson Institute Working Papers Series 343, William Davidson Institute at the University of Michigan.
    2. Puhani, Patrick A., 2000. "On the identification of relative wage rigidity dynamics: a proposal for a methodology on cross-section data and empirical evidence for Poland in transition," ZEW Discussion Papers 00-56, ZEW - Leibniz Centre for European Economic Research.
    3. Brücker, Herbert & Hauptmann, Andreas & Jahn, Elke J. & Upward, Richard, 2014. "Migration and imperfect labor markets: Theory and cross-country evidence from Denmark, Germany and the UK," European Economic Review, Elsevier, vol. 66(C), pages 205-225.
    4. Louis N. Christofides & Thanasis Stengos, 2003. "Wage Rigidity in Canadian Collective Bargaining Agreements," ILR Review, Cornell University, ILR School, vol. 56(3), pages 429-448, April.
    5. Elhorst, J. Paul & Blien, Uwe & Wolf, Katja, 2002. "A spatial panel approach to the east German wage curve," ERSA conference papers ersa02p444, European Regional Science Association.
    6. Lili Kang & Fei Peng, 2017. "Wage flexibility in the Chinese labour market, 1989–2009," Regional Studies, Taylor & Francis Journals, vol. 51(4), pages 616-628, April.
    7. Ch. Pissarides., 2011. "The Unemployment Volatility Puzzle: Is Wage Stickiness the Answer?," VOPROSY ECONOMIKI, N.P. Redaktsiya zhurnala "Voprosy Economiki", vol. 1.
    8. Shin, Donggyun & Shin, Kwanho, 2008. "Why Are The Wages Of Job Stayers Procyclical?," Macroeconomic Dynamics, Cambridge University Press, vol. 12(1), pages 1-21, February.
    9. Verdugo, Gregory, 2016. "Real wage cyclicality in the Eurozone before and during the Great Recession: Evidence from micro data," European Economic Review, Elsevier, vol. 82(C), pages 46-69.
    10. Jinpeng Ma, 2004. "Jobless Recovering and Equilibrium Involuntary Unemployment with a Simple Efficiency Wage Model," Departmental Working Papers 200404, Rutgers University, Department of Economics.
    11. Devicienti, Francesco & Maida, Agata & Pacelli, Lia, 2008. "The resurrection of the Italian wage curve," Economics Letters, Elsevier, vol. 98(3), pages 335-341, March.
    12. Sanz-de-Galdeano, Anna & Turunen, Jarkko, 2006. "The euro area wage curve," Economics Letters, Elsevier, vol. 92(1), pages 93-98, July.
    13. Bill Collier, 2000. "The UK Wage Curve: New Evidence from the British Household Panel Survey," Studies in Economics 0010, School of Economics, University of Kent.
    14. Puhani, Patrick A., 2002. "Relative wage and unemployment changes in Poland: microeconometric evidence," Economic Systems, Elsevier, vol. 26(2), pages 99-126, June.
    15. Louis Christofides & Thanasis Stengos, 2001. "Nominal Wage Rigidity: Non-Parametric Tests Based on Union Data for Canada," CESifo Working Paper Series 535, CESifo.
    16. Víctor M. Montuenga‐Gómez & José M. Ramos‐Parreño, 2005. "Reconciling the Wage Curve and the Phillips Curve," Journal of Economic Surveys, Wiley Blackwell, vol. 19(5), pages 735-765, December.
    17. Seamus Hogan, 1998. "What Does Downward Nominal-Wage Rigidity Imply for Monetary Policy?," Canadian Public Policy, University of Toronto Press, vol. 24(4), pages 513-525, December.
    18. Konyalı, Gonca, 2012. "Wage Curve Evidence From Turkey’s 2007-2009 Income and Living Conditions Survey," INVESTIGACIONES REGIONALES - Journal of REGIONAL RESEARCH, Asociación Española de Ciencia Regional, issue 24, pages 199-210.
    19. Gavin Cameron & John Muellbauer, 2001. "Earnings, unemployment, and housing in Britain," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 16(3), pages 203-220.
    20. Sergio Destefanis & Giovanni Pica, 2010. "It’s wages, it’s hours, it’s the Italian wage curve," CSEF Working Papers 247, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy.

    More about this item

    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

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:nbr:nberch:8882. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: . General contact details of provider: https://edirc.repec.org/data/nberrus.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (email available below). General contact details of provider: https://edirc.repec.org/data/nberrus.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.