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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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  • Alok Kumar, 2004. "Inflation and the Dispersion of Real Wages," Econometric Society 2004 Far Eastern Meetings 750, Econometric Society.
    • Handle: RePEc:ecm:feam04:750
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    Cited by:

    1. Gomis-Porqueras, Pedro & Huangfu, Stella & Sun, Hongfei, 2020. "The role of search frictions in the long-run relationships between inflation, unemployment and capital," European Economic Review, Elsevier, vol. 123(C).
    2. Seip, Knut Lehre & McNown, Robert, 2015. "Does employees’ compensation vary with corporate profit?," Journal of Policy Modeling, Elsevier, vol. 37(2), pages 281-290.
    3. 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.
    4. Alok Kumar, 2013. "Inflation, Redistribution, and Real Activities," Department Discussion Papers 1302, Department of Economics, University of Victoria.

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    More about this item

    Keywords

    Inflation; Wage Posting; Search; Dispersion of Real;
    All these keywords.

    JEL classification:

    • E0 - Macroeconomics and Monetary Economics - - General
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
    • N3 - Economic History - - Labor and Consumers, Demography, Education, Health, Welfare, Income, Wealth, Religion, and Philanthropy

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