Inflation and unemployment revisited: grease vs. sand

As inflation rates in the United States decline, analysts are asking if there are economic reasons to hold the rates at levels above zero. Previous studies of whether inflation "greases the wheels" of the labor market ignore inflation's potential for disrupting wage patterns in the same market. This paper outlines an institutionally-based model of wage-setting that allows the benefits of inflation (downward wage flexibility) to be separated from disruptive uncertainty about inflation rate (undue variation in relative prices). Our estimates, using a unique 40-year panel of wage changes made by large mid-western employers, suggest that low rates of inflation do help the economy to adjust to changes in labor supply and demand. However, when inflation's disruptive effects are balanced against this benefit the labor market justification for pursuing a positive long-term inflation goal effectively disappears

Inflation goals: guidance from the labor market?

As inflation rates in the United States decline, analysts are asking if there are economic reasons to hold the rates at levels above zero. A study of inflation's effects on the labor market suggests that low rates of inflation do help the economy to adjust to changes in labor supply and demand. When inflation's disruptive effects are balanced against this benefit, however, the labor market justification for pursuing a positive long-term inflation goal effectively disappears.Inflation (Finance) ; Labor market

Firms' wage adjustments: a break from the past?

The authors examine 39 years of wage data for workers in mobile occupations within a set of employers in three midwestern cities. They study wage changes during years of rising, falling, and steady inflation to identify regularities that could broaden understanding of the inflationary process at the micro level.Inflation (Finance) ; Wages ; Labor market

Identifying inflations grease and sand effects in the labor market

An effort to distinguish inflations distortionary effects from its facilitation of adjustments to shocks when wages are rigid downward. It uses the following identification strategy: inflation-induced deviations among employers mean wage changes represent unintended intramarket distortions (sand), while inflation-induced, interoccupational wage changes reflect adjustments that might have been prevented by nominal wage rigidity (grease).Inflation (Finance) ; Wages

Identifying Inflation's Grease and Sand Effects in the Labor Market

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.

Macro- and microeconomic consequences of wage rigidity

An exploration of the micro- and macroeconomic theories, implications, and evidence of wage rigidity from the perspective of human resource managers and economic researchers, showing that human resource policies can subtly alter the rigidity of wages.Unemployment ; Wages

The effects of inflation on wage adjustments in firm-level data: grease or sand?

An analysis of whether inflation facilitates adjustments to shocks or distorts relative prices, examining the wage-setting process across a panel of occupations and employers and finding that the costs of inflation may rise more rapidly than its benefits beyond quite modest rates of increase in the price level.Inflation (Finance) ; Wages

Firms' wage adjustments: a break from the past

Wages