Title: Inflation and Wage Inequality: Empirical Evidence and a Model of Frictional Markets
Abstract: The US data over the period 1994-2009 show that inflation has positive effect on the residual wage inequality, and this impact primarily operates through stronger effect on low wages relative to high wages. To explain this, we introduce lack of coordination in the labor market into the model by Berensen, Menzio and Wright (2011). In the model, the lack of coordination in job applications by workers give rise to an equilibrium where firms are matched with zero, one or multiple job applicants. Through the channel of bargaining power, the model generates a wage distribution. Inflation influences the wage distribution directly through its impacts on real profits and indirectly via spillover effect. Quantitatively, the calibrated model can generate observed adjustments of high wages and 65 percent of changes in low wages. However, the predicted residual wage disparity changes a little due to small spillover effect.
Publication Year: 2011
Publication Date: 2011-01-01
Language: en
Type: article
Indexed In: ['crossref']
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