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Inflation and Labor Market Flexibility: The Squeaky Wheel Gets the Grease

Listed author(s):
  • Ugo Panizza
  • Ana Maria Loboguerrero

Inflation can “grease†the wheels of the labor market by relaxing downward wage rigidity but it can also increase uncertainty and have a negative “sand†effect. This paper studies the grease effect of inflation by looking at whether the interaction between inflation and labor market regulations affects how employment responds to changes in output. The results show that in industrial countries with highly regulated labor markets, the grease effect of inflation dominates the sand effect. In the case of developing countries, we rarely find a significant effect of inflation or labor market regulations and provide evidence indicating that this could be due to the presence of a large informal sector and limited enforcement of de jure labor market regulations.

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File URL: http://repec.org/esLATM04/up.8700.1078441311.pdf
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Paper provided by Econometric Society in its series Econometric Society 2004 Latin American Meetings with number 3.

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Date of creation: 11 Aug 2004
Handle: RePEc:ecm:latm04:3
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  1. Carmen Pagés-Serra, 2000. "The Cost of Job Security Regulation: Evidence from Latin American Labor Markets," ECONOMIA JOURNAL OF THE LATIN AMERICAN AND CARIBBEAN ECONOMIC ASSOCIATION, ECONOMIA JOURNAL OF THE LATIN AMERICAN AND CARIBBEAN ECONOMIC ASSOCIATION, vol. 0(Fall 2000), pages 109-154, August.
  2. James J. Heckman & Carmen Pages, 2000. "The Cost of Job Security Regulation: Evidence from Latin American Labor Markets," NBER Working Papers 7773, National Bureau of Economic Research, Inc.
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  4. Guillermo Calvo & Frederic S. Mishkin, 2003. "The Mirage of Exchange Rate Regimes for Emerging Market Countries," NBER Working Papers 9808, National Bureau of Economic Research, Inc.
  5. Juan Botero & Simeon Djankov & Rafael LaPorta & Florencio López-de-Silanes & Andrei Shleifer, "undated". "The Regulation of Labor," Working Paper 19483, Harvard University OpenScholar.
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  8. Erica L. Groshen & Mark E. Schweitzer, 1997. "Identifying inflations grease and sand effects in the labor market," Working Paper 9705, Federal Reserve Bank of Cleveland.
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  10. 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.
  11. 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.
  12. Bertola, Giuseppe, 1990. "Job security, employment and wages," European Economic Review, Elsevier, vol. 34(4), pages 851-879, June.
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  14. Olivier Blanchard & Justin Wolfers, 1999. "The Role of Shocks and Institutions in the Rise of European Unemployment: The Aggregate Evidence," NBER Working Papers 7282, National Bureau of Economic Research, Inc.
  15. 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.
  16. Arellano, Manuel & Bover, Olympia, 1995. "Another look at the instrumental variable estimation of error-components models," Journal of Econometrics, Elsevier, vol. 68(1), pages 29-51, July.
  17. Tobin, James, 1972. "Inflation and Unemployment," American Economic Review, American Economic Association, vol. 62(1), pages 1-18, March.
  18. Friedman, Milton, 1977. "Nobel Lecture: Inflation and Unemployment," Journal of Political Economy, University of Chicago Press, vol. 85(3), pages 451-472, June.
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  20. Wyplosz, Charles, 2001. "Do We Know How Low Inflation Should Be?," CEPR Discussion Papers 2722, C.E.P.R. Discussion Papers.
  21. Laurence Ball, 1996. "Disinflation and the NAIRU," NBER Working Papers 5520, National Bureau of Economic Research, Inc.
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