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"Inflation has been accused of causing distortionary prices 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 employer's 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 is beneficial but statistically indistinguishable from zero. It turns detrimental after that. When positive, net benefits never exceed a tenth of gross benefits"--Federal Reserve Bank of New York web site.
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Subjects
Econometric models, Effect of inflation on, Inflation (Finance), Labor market, Prices, WagesPlaces
Middle WestShowing 2 featured editions. View all 2 editions?
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1
Identifying inflation's grease and sand effects in the labor market
1997, Federal Reserve Bank of New York
Electronic resource
in English
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Identifying inflation's grease and sand effects in the labor market
1997, National Bureau of Economic Research
in English
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Book Details
Edition Notes
"June 1997."
JEL no.E31, E52, J30.
Includes bibliographical references (p. 30-32).
Electronic access limited to Binghamton University faculty, staff and students for instructional and research purposes only.
Electronic version available via the Internet at the NBER World Wide Web site.
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