TY  - JOUR
AU  - Groshen, Erica L
AU  - Schweitzer, Mark E
TI  - Identifying Inflation's Grease and Sand Effects in the Labor Market
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 6061
PY  - 1997
Y2  - June 1997
DO  - 10.3386/w6061
UR  - http://www.nber.org/papers/w6061
L1  - http://www.nber.org/papers/w6061.pdf
N1  - Author contact info:
Erica Groshen
Former Commissioner of the
Bureau of Labor Statistics
Cornell University - ILR
Tel: 516-974-3310
E-Mail: erica.groshen@cornell.edu
M1  - published as Erica Groshen, Mark Schweitzer. "Identifying Inflation's Grease and Sand Effects in the Labor Market," in Martin Feldstein, editor, "The Costs and Benefits of Price Stability" University of Chicago Press (1999)

AB  - Inflation has been accused of causing distortionary price and wage fluctuations (sand) as well as lauded for facilitating adjustments to shocks when wages are rigid downwards (grease). This paper investigates whether these two effects can be distinguished from each other in a labor market by the following identification strategy: inflation-induced deviations among employers' mean wage changes represent unintended intramarket distortions (sand), while inflation-induced, inter-occupational wage changes reflect intended alignments with intermarket forces (grease). Using a unique 40-year panel of wage changes made by large mid-western employers, we find a wide variety of evidence to support the identification strategy.  We also find some indications that occupational wages in large firms gained flexibility in the past four years.  These results strongly support other findings that grease and sand effects exist, but also suggest that they offset each other in a welfare sense and in unemployment effects.  Thus, at levels up to five percent, the net impact of inflation on unemployment is beneficial but statistically indistinguishable from zero.  It turns detrimental after that.  When positive, net benefits never exceed a tenth of gross benefits.
ER  -