Inflation and Labor-Market Adjustment

28 Pages Posted: 28 May 2004 Last revised: 28 Aug 2022

See all articles by Daniel S. Hamermesh

Daniel S. Hamermesh

University of Texas at Austin - Department of Economics; National Bureau of Economic Research (NBER); IZA Institute of Labor Economics

Date Written: June 1983

Abstract

The implications of downward nominal and ex ante real wage rigidity,and of wage contracting for the dispersion of relative wage changes in the presence of price inflation are examined. Rigidity implies that unexpected inflation will raise the variability of relative wage changes; contracting implies unexpected inflation reduces variability. Using data on manufacturing industries for 1955-81, and on private nonfarm industries for1965-81,these hypotheses are studied. The dispersion in relative wage cnanges is reduced by greater price inflation. Most of the reduction is a response to unexpected inflation: Expected inflation has little impact on dispersion.These findings hold for subperiods within the sample, and are robust to different choices of measures of price expectations,including those of the Livingston survey, the Survey Research Center household data, and ARMA forecasts. They stand in striking contrast to the commonly accepted result that price inflation is associated with greater dispersion of relative price changes. They suggest that inflation reduces the ability of relative wages to signal disequilibria among labor markets.

Suggested Citation

Hamermesh, Daniel S., Inflation and Labor-Market Adjustment (June 1983). NBER Working Paper No. w1153, Available at SSRN: https://ssrn.com/abstract=305537

Daniel S. Hamermesh (Contact Author)

University of Texas at Austin - Department of Economics ( email )

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National Bureau of Economic Research (NBER)

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IZA Institute of Labor Economics

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