TY  - JOUR
AU  - Card, David
AU  - Hyslop, Dean
TI  - Does Inflation "Grease the Wheels of the Labor Market"?
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 5538
PY  - 1996
Y2  - April 1996
DO  - 10.3386/w5538
UR  - http://www.nber.org/papers/w5538
L1  - http://www.nber.org/papers/w5538.pdf
N1  - Author contact info:
David Card
Department of Economics
549 Evans Hall, #3880
University of California, Berkeley
Berkeley, CA  94720-3880
Tel: 510/642-5222
Fax: 510/643-7042
E-Mail: card@econ.berkeley.edu

Dean Hyslop
PO Box 3724
Wellington
NEW ZEALAND
New Zealand
E-Mail: dean.hyslop@treasury.govt.nz
M1  - published as David Card, Dean Hyslop. "Does Inflation "Grease the Wheels of the Labor Market"?," in Christina D. Romer and David H. Romer, Editors, "Reducing Inflation: Motivation and Strategy" University of Chicago Press (1997)

AB  - 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.
ER  -