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

Author

Listed:
  • David Card

    (Princeton University)

  • Dean Hyslop

    (University of California)

Abstract

One of the basic tenets of Keynesian economics is that labor market institutions cause downward nominal wage rigidity. We attempt to evaluate the evidence that relative wage adjustments occur more quickly in higher-inflation environments. Using matched individual wage data from consecutive years, we find that about 6-10 percent of workers experience wage rigidity in a 10-percent inflation environment, while this proportion rises to over 15 percent when inflation is less than 5 percent. By invoking a simple symmetry assumption, we generate counterfactual distributions of wage changes from the distributions of actual wage changes. Using these counterfactual distributions, we estimate that, over the sample period, a 1 percent increase in the inflation rate reduces the fraction of workers affected by downward nominal rigidities by about 0.5 percent, and slows the rate of real wage growth by about 0.06 percent. Using state-level data, the analysis of the effects of nominal rigidities 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.

Suggested Citation

  • David Card & Dean Hyslop, 1995. "Does Inflation "Grease the Wheels of the Labor Market"?," Working Papers 735, Princeton University, Department of Economics, Industrial Relations Section..
  • Handle: RePEc:pri:indrel:356
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    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.
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    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.
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    More about this item

    Keywords

    wage rigidity; inflation; flexibility;

    JEL classification:

    • B49 - Schools of Economic Thought and Methodology - - Economic Methodology - - - Other

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